MUMBAI: The $136.4 billion raised by banks from non-residents and foreign lenders, then swapped with RBI, has swelled India’s foreign-exchange reserves by a record $44.9 billion to $785.7 billion in the week ended Sept 4. The windfall gives RBI a larger war chest to defend the rupee, but creates a problem at home with too much cash in the banking system.RBI is now trying to mop up that liquidity. On Friday, it announced a Rs 1 lakh crore open-market sale of govt bonds, turning a successful foreign-currency fund-raising exercise into a domestic liquidity-management headache.RBI will sell Rs 1 lakh crore of govt bonds maturing in FY29-32 in three tranches on Sept 17, 21 and 28 to drain surplus liquidity. This is its first net bond sale in two years. Bond yields rose after the announcement, with the 10-year yield up six basis points to 7.04% and the five-year yield nearly 10 basis points to 6.62%.
Highest weekly increases
Banks raised $127 billion through the special forex mobilisation scheme, creating surplus rupee liquidity and pushing overnight rates below the repo rate. Markets had expected measures including FX swaps, MSS bonds, OMO sales and a possible CRR hike.
Exploring oprions: RBI
In an interview with a TV channel, RBI governor Sanjay Malhotra said the central bank had several options to manage liquidity beyond VRRR, including open market operations and FX swaps. He said “nothing is off the table.” RBI has also been using dollar-rupee swaps to reduce banks’ rupee holdings. FCNR(B) deposits mobilised through the recently concluded RBI swap facility totalled $127.2 billion. Malhotra said the flows were “very robust” and reflected strong investor confidence in India’s macroeconomic fundamentals. He said the exercise showed that foreign capital could be mobilised within a short period and strengthened financial stability and external sector resilience.He also said the inflows had helped stabilise the forex market. “It has given us the liquidity at the same time, and it has improved sentiments,” he said. Nearly half of the deposits, or around 48.5-50%, have a five-year tenure. About 42% fall in the three-to-four-year maturity bracket and around 9% in the four-to-five-year window. Some of the liquidity will be withdrawn automatically over time, he said. Higher crude prices remain a risk to inflation.
Eye on inflation
Malhotra said the impact would depend on the extent to which higher costs are passed through. “Crude has gone up. July was for the Indian basket an average of $82 (per barrel). Aug it has gone up to $90 (per barrel) and so that will certainly have some impact, but it will depend again on the pass-through,” he said.Malhotra said govt had absorbed and cushioned much of the oil shock, helping the economy weather the impact. RBI will continue to watch inflation persistence, expectations and generalisation ahead of the next monetary policy committee meeting on Oct 5-7. “I mean, risks are there on both sides… The MPC will make a reassessment of the growth-inflation dynamics when it meets in a month or so. Let me not give my assessment,” he said.
