Indian central bank drains $10 billion to lift short-term rates

India’s central bank drained 849.75 billion rupees ($10 billion) of excess cash from the banking system in its first such operation in seven months, aiming to lift overnight borrowing costs.

The Reserve Bank of India withdrew funds via a 7-day variable rate reverse repo auction at a 5.49% cutoff yield on Friday, it said in a statement. The RBI had planned to soak up one trillion rupees. 

The move to absorb excess liquidity is likely aimed to align overnight borrowing costs with the policy rate — currently at 5.5%. Overnight rates have remained below the policy rate for several months.

“Liquidity will still be in surplus even after this operation,” said Ritesh Bhusari, joint general manager for treasury at South Indian Bank. “The RBI will keep liquidity in surplus of around 1.5%-2% of net deposits, and if it goes beyond that, they may follow up with further operations.”

The 7.02% 2027 bond was trading one basis point higher at 5.80% while the benchmark 10-year bond yield was also up by a similar margin at 6.29%.

Overnight rates have consistently traded below the repo rate over the past two months, reflecting the RBI’s large liquidity infusions — totaling over 9.5 trillion rupees since January. However, those rates edged higher following the central bank’s announcement of the liquidity withdrawal on Tuesday.

As of June 26, the liquidity surplus in the banking system stood at approximately 2.5 trillion rupees, according to Bloomberg Economics’ Liquidity Index.