RBI drains $20 billion liquidity via FX operations, bond sales

The Reserve Bank of India has drained nearly $20 billion in excess rupee liquidity from the banking system through foreign exchange operations, bond sales, and reverse repo transactions, according to bankers familiar with the matter. Dollar-rupee swaps have emerged as a prominent tool in this liquidity management effort. These measures, combined with tax outflows, have more than halved the banking system's liquidity surplus from a record 11.16 trillion rupees in the first week of September.

The RBI employed a combination of dollar-rupee sell-buy swaps, spot dollar sales, bond sales, and variable-rate reverse repos to drain the excess liquidity. Net dollar sales of approximately $18.5 billion through spot transactions and sell-buy swaps, along with bond sales, drove the significant decline in surplus liquidity. Core liquidity, which strips out daily swings in cash balances to show more persistent surplus, fell to 11.5 trillion rupees from a peak of 14.2 trillion rupees on September 4. Economists estimate another 1.5 trillion rupees of liquidity may be removed via additional bond sales and sell-buy FX swaps.

The central bank's sell-buy swaps have pushed dollar-rupee forward premiums higher, raising the cost of hedging dollar exposure, with the one-year premium up around 50 basis points during the month. RBI Governor Sanjay Malhotra had previously signaled the central bank would use these tools to manage surplus liquidity, citing bond sales and FX swaps among available options.