RBI drains another Rs 25,000 crore through bond sale as banking liquidity surplus stays high

The Reserve Bank of India on Monday accepted bids worth Rs 25,000 crore in the second tranche of its open market operation sale of government securities, stepping up its efforts to absorb the large liquidity surplus in the banking system. The central bank accepted Rs 11,512 crore of the 6.10 per cent GS 2031 and Rs 8,758 crore of the 7.95 per cent GS 2032, accounting for the bulk of the securities sold in the auction.

It also accepted Rs 2,300 crore of the 6.75 per cent GS 2029, Rs 2,250 crore of the 7.17 per cent GS 2030 and Rs 180 crore of the 7.17 per cent GS 2028. No bids were accepted for the 8.28 per cent GS 2027. The latest auction follows the Rs 50,000 crore OMO sale conducted on September 17, taking the cumulative liquidity absorption planned through the first two tranches to Rs 75,000 crore.

Surplus remains high

The bond sale comes as the banking system continues to hold a substantial liquidity surplus, estimated at around Rs 6.05 lakh crore as of September 20. An OMO sale is one of the instruments available to the RBI to manage liquidity. When the central bank sells government securities, banks and other market participants pay the RBI for the bonds, effectively withdrawing an equivalent amount of rupee liquidity from the financial system. The operation is therefore the reverse of an OMO purchase, under which the RBI buys government securities and injects liquidity into the banking system.

The central bank had announced on September 11 that it would sell government securities worth an aggregate Rs 1 lakh crore after reviewing prevailing and evolving liquidity conditions. The programme was divided into three auctions — Rs 50,000 crore on September 17, followed by Rs 25,000 crore each on September 21 and September 28.

Rs 25,000 crore more next week

The third and final tranche of Rs 25,000 crore is scheduled for September 28. Once completed, the three auctions would withdraw up to Rs 1 lakh crore from the banking system, subject to the RBI’s acceptance of bids. The return to auction-based OMO sales has attracted attention in the bond market because the RBI had not used such sales for liquidity management on this scale for several years.

The first tranche on September 17 saw the central bank accept the full notified amount of Rs 50,000 crore across six government securities. The latest round indicates that the RBI is continuing with calibrated liquidity withdrawal rather than attempting to eliminate the surplus in a single operation.

FCNR deposits add liquidity

A significant part of the excess liquidity has been linked to heavy mobilisation of Foreign Currency Non-Resident Bank, or FCNR(B), deposits.

Banks raising such deposits receive foreign currency, which can subsequently be swapped with the RBI. These transactions provide rupee liquidity to banks, adding funds to the domestic financial system.

Government expenditure has also contributed to the surplus. Payments by the government, including salaries and pensions, release money into the banking system and can temporarily increase liquidity. The combination of these flows left banks with substantially more funds than required, prompting the RBI to use durable liquidity-absorption measures.

Managing the transition

Persistently excessive liquidity can weaken the transmission of monetary policy because banks with abundant funds have less need to borrow in the money market at rates linked to the RBI’s policy framework.

At the same time, withdrawing liquidity too rapidly can tighten financial conditions and affect credit availability. The RBI’s staggered Rs 1 lakh crore OMO programme allows the central bank to absorb part of the surplus while assessing market conditions between auctions. With Rs 75,000 crore of the announced programme now covered through the first two tranches, attention will turn to the September 28 auction and whether further liquidity-management measures will be required if the banking system continues to remain heavily in surplus.