Reserve Bank of India Deploys Multiple Tools to Drain Liquidity

The Reserve Bank of India is executing a multi-pronged strategy to drain surplus rupee liquidity from the financial system to align money market rates with the repo rate and mitigate inflation risks. Over the past two weeks, the central bank conducted currency swaps worth at least $10 billion, selling dollars to lenders in exchange for rupees. These sell-buy swaps, with maturities between one and six months, are significantly larger than the typical $3 billion to $5 billion tranches used in previous auctions.

This aggressive intervention follows a record surge in foreign capital inflows exceeding $140 billion, which pushed surplus banking liquidity to approximately $115 billion earlier this month. To further manage this excess, the central bank held an overnight variable rate reverse repo auction on Wednesday. While reports vary, most sources indicate the bank absorbed approximately Rs 75,026 crore from bids totaling Rs 87,993 crore at a weighted average rate of 5.24 per cent, though one source reported a lower absorption of Rs 71,971 crore from a Tuesday auction.

These actions complement ongoing open market operations involving the sale of government securities. The bank sold Rs 75,000 crore in securities on September 17 and 21, with a final Rs 25,000 crore tranche scheduled for September 28. The current liquidity surplus, estimated between Rs 4.45 trillion and Rs 4.92 trillion, has been driven by heavy mobilization of FCNR(B) deposits and month-end government spending on salaries and pensions.