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India central bank seeks to soak up bank liquidity after note ban

Bank deposits had surged from India’s demonetisation drive

Gulf News

NEW DELHI: The Reserve Bank of India on Saturday ordered banks to deposit their extra cash with it, in a bid to absorb the excess liquidity generated by a government ban on larger banknotes.

Many Indians deposited their old notes with their banks after the ban on 500 and 1,000 rupee notes on November 8, which is aimed at tax evaders and counterfeiting.

Banks had put this cash into government bonds, sparking a rally that saw the benchmark 10-year bond yield fall more than 50 basis points to its lowest in more than 7-1/2 years.

The central bank said banks would need to transfer 100 per cent of their cash under the RBI’s cash reserve ratio from deposits generated between September 16 and November 11, saying it was a temporary measure that would be reviewed on or before December 9.

The move is likely to drain over 3.24 trillion rupees ($47.29 billion) from the banks, according to Reuters estimates.

“This is intended to absorb a part of the surplus liquidity (in the banking system),” the RBI said.

Traders said the decision was likely intended to cap any further gains in government bonds, given worries that banks would eventually have to sell some of their debt.

“RBI had to do something to stop the crazy bond rally,” Sandip Sabharwal, a Mumbai-based private fund manager said.

Traders said bond market yields could rise 8-10 bps on Monday given the RBI move would deprive the key source of funding seen in the past couple of weeks, traders said.

On Friday the central also relaxed its liquidity auction rules by expanding its basket of securities that it accepts as collateral.