RBI Drains Nearly $20 Billion From Surplus Liquidity

The Reserve Bank of India has absorbed an estimated $20 billion in excess rupee liquidity from the banking system through foreign exchange operations, according to two bankers. The RBI has used dollar-rupee sell-buy swaps, spot dollar sales, bond sales and variable-rate reverse repos to manage surplus funds.

The measures, combined with tax outflows, have sharply reduced the banking system’s liquidity surplus from a record 11.16 trillion rupees ($116.1 billion) earlier this month. Economists estimate that core liquidity fell to 11.5 trillion rupees from a peak of 14.2 trillion rupees on September 4, with RBI dollar sales and swaps contributing significantly to the decline.

FX swaps have become an increasingly important tool for the central bank, while the operations have also pushed dollar-rupee forward premiums higher and increased the cost of hedging dollar exposure. RBI Governor Sanjay Malhotra has previously indicated that the central bank could use bond sales and FX swaps to manage excess liquidity without relying primarily on changes to cash reserve requirements.

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