The Reserve Bank of India (RBI) will sell bonds in the open market to absorb durable liquidity once government spending picks up, two sources told Reuters on Friday.
Durable liquidity refers to the long-term liquidity surplus in the banking system. Core liquidity surplus includes the government’s cash balances held with the central bank.
The RBI said earlier this month that it will sell bonds through open market operations (OMOs) to manage banking system liquidity. However, it did not disclose the quantum or timing of the bond sales.
The uncertainty has made bond investors nervous, and pushed up yields.
The RBI would prefer to keep liquidity in “some surplus” to help the productive sectors of the economy, but it will sell bonds when there is a durable surplus, the sources said.
Frictional changes refer to short-term swings in banking liquidity. Banking system liquidity – the amount of funds in the interbank system – was in a deficit of nearly 179 billion rupees on Thursday, wider than Wednesday’s 30-billion-rupee deficit.
Banking liquidity is expected to move back to surplus by early November on government expenditure and as bonds worth around 540 billion rupees mature on Nov. 2.
The RBI’s bond sales “will be triggered once liquidity in the system is in surplus and that may cause inflationary pressures,” Arun Bansal, executive director and head of treasury at IDBI Bank, said.
Likely inflow from RBI’s forex swap maturity, bond redemptions through December and government spending could trigger bond sales, Bansal added.
