5 hrs ago
RBI drains $20 billion to manage India’s excess liquidity
India’s central bank has been taking extra money out of banks.
It did this partly by trading dollars for rupees and later reversing those trades.
It also sold bonds and used other tools to reduce available cash.
The amount removed through foreign-exchange operations is estimated at about $20 billion.
This reduced the large cash surplus in India’s banking system.
Economists said the surplus had fallen substantially from its early-September peak.
The central bank’s actions also made it more expensive to protect against future dollar movements.
Officials said these measures are intended to manage liquidity while avoiding disruptive economic shocks.
The Reserve Bank of India has removed an estimated $20 billion of excess rupee liquidity through foreign-exchange operations.
The RBI used dollar-rupee sell-buy swaps, spot dollar sales, bond sales and variable-rate reverse repos.
Banking-system liquidity surplus fell from a record 11.16 trillion rupees earlier in September.
Core liquidity declined to 11.5 trillion rupees from 14.2 trillion rupees on September 4, according to IDFC First Bank.
The RBI’s sell-buy swaps lifted one-year forward premiums by about 50 basis points, increasing dollar-hedging costs.
- Who
- The Reserve Bank of India, with estimates from economists and comments from bankers.
- What
- The RBI drained an estimated $20 billion of excess rupee liquidity through foreign-exchange and other market operations.
- Where
- India’s banking and foreign-exchange markets.
- When
- In recent weeks, with data and estimates reported on September 29.
- Why
- To reduce surplus liquidity while managing potential economic shocks; the RBI had indicated that bond sales and foreign-exchange swaps were available tools.
Liquidity-management rationale
Market-impact concerns
Use of foreign-exchange swaps
Liquidity-management rationale
The RBI is using sell-buy swaps as an important tool to reduce excess liquidity, alongside bond sales and reverse repos.
Market-impact concerns
The swaps have pushed dollar-rupee forward premiums higher, increasing the cost of hedging dollar exposure.
Policy approach
Liquidity-management rationale
Axis Bank said the RBI was calibrating liquidity while shielding the economy from potentially disruptive shocks.
Market-impact concerns
Bankers and economists noted that the operations have materially reduced the banking system’s liquidity surplus and affected foreign-exchange pricing.
Key facts
- Estimated FX liquidity drained
- About $20 billion
- Core liquidity
- 11.5 trillion rupees, down from 14.2 trillion rupees on September 4
- Earlier liquidity surplus
- 11.16 trillion rupees in the first week of September
- Estimated net dollar sales
- About $18.5 billion through spot transactions and sell-buy swaps, according to IDFC First Bank’s chief economist
- Additional potential liquidity removal
- Economists estimated another 1.5 trillion rupees could be removed through bond sales and sell-buy FX swaps
- Forward-premium change
- The one-year dollar-rupee premium rose about 50 basis points during September
- Exchange rate cited
- $1 equaled 96.1250 Indian rupees
Quotes
Gaura Sengupta
Chief economist at IDFC First Bank
“The RBI is simultaneously calibrating liquidity while shielding the economy from potentially disruptive shocks.”
livemint.com
“We estimate another 1.5 trillion rupees of liquidity may be removed via bond sales and sell-buy FX swaps”
livemint.com
Sources
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