Surplus Liquidity Spurs Market Anticipation: RBI Contemplates Strategic Moves to Absorb Excess Funds

In a financial turnaround, the banking system’s liquidity surged into surplus territory after a three-week stint, as per recent data from the Reserve Bank of India (RBI). This welcome change was attributed to robust government spending, a move that resonated positively with market dealers.

This liquidity relief is anticipated to grow even more pronounced with the imminent disbursement of the final tranche of the incremental cash reserve ratio (I-CRR), valued at a substantial Rs 50,000 crore, scheduled for Saturday.

With the surplus liquidity becoming prominent, participants in the bond market are anticipating strategic moves from the RBI, specifically the announcement of open market operations (OMO) involving bond sales. This strategic step is poised to absorb the excess liquidity, a move keenly awaited by market stakeholders.

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Projections suggest that the central bank might initiate bond sales ranging from Rs 10,000 crore to Rs 15,000 crore in the upcoming auction. Consequently, traders hastened to square off their positions towards the end of the trading period. This rush led to a strengthening of yields, evident in the benchmark 10-year government bond yield settling at 7.38 per cent on Monday, marking a slight increase from the 7.34 per cent recorded on Friday. The market remains on alert, watching closely for further developments as these financial dynamics continue to unfold.

“The liquidity improved because of the government spending, and rollback of I-CRR,” a dealer at a primary dealers said. “As the liquidity is in surplus now, there are expectations the RBI will come up with a notification on OMO. That’s why the yields rose by the end of the day,” he said (Business Standard).

“Going forward, while remaining nimble, we may have to consider OMO sales to manage liquidity, consistent with the stance of monetary policy. The timing and quantum of such operations will depend on the evolving liquidity conditions,” Das had said.

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Over the weekend, Indian banks deposited significant sums of money, totaling Rs 17,221 crore, as reported by RBI data. On Friday, banks parked Rs 2,760 crore, followed by Rs 5,390 crore on Saturday, and a substantial Rs 9,071 crore on Sunday. This influx of funds underscores the banking sector’s effort to manage their liquidity effectively.

The situation prompted a response from RBI Governor Shaktikanta Das, who indicated on Friday the possibility of conducting Open Market Operations (OMOs). These operations would serve to absorb the surplus liquidity, aligning with the central bank’s strategic approach to maintain financial stability.

The committee responsible for setting interest rates has acknowledged that high inflation poses a significant threat to both macroeconomic stability and long-term sustainable growth. Their primary objective is to ensure that inflation is consistently maintained at the targeted rate of 4 percent. As per market expectations, the excess liquidity in the financial system is anticipated to continue for the next couple of weeks until the outflows related to Goods and Service tax commence, starting approximately on October 20th.