India's central bank withdraws over 6 trillion rupees of bank liquidity after record spike

MUMBAI: The Indian central bank absorbed more than 6 trillion rupees ($63.53 billion) through cash withdrawal operations on Monday, a day after banking liquidity surged to a record high.

The Reserve Bank of India received offers worth 3.53 trillion rupees at an overnight auction, right after banks parked 2.59 trillion rupees through a 30-day auction.

The RBI had aimed ‌to withdraw ⁠7 trillion ⁠rupees through the 30-day operation, which saw weak participation due to technical glitches, five traders said.


However, ​a person familiar with the matter said there were no glitches and that all bids ​went through the RBI's e-Kuber system, which is used for such auctions. The person requested anonymity as they are not authorised to speak to media.

The RBI ​did not respond to an email seeking comment.

Large ⁠liquidity surpluses, if ‌sustained, risk raising inflation and boosting financial assets. The RBI last month hinted that rate hikes could be ahead as inflation and ⁠growth firm up.

"Even though the response was not up ​to the mark, we could see another long duration reverse ​repo later in the week," a treasury official said.

India's banking system liquidity surplus hit 11.6 trillion rupees on September 6, amounting to nearly 4% of the banking system deposits.

The spike comes after India received a steeper-than-expected $136 billion under special one-off schemes aimed at boosting the country's external balances.

The RBI's total liquidity ‌withdrawals have topped 8.5 trillion rupees, and these funds will come back to the system as the operations mature.

IDFC First Bank expects the central bank to use a ⁠combination of instruments given the level of excess liquidity that needs to be drained.

"The preferred option would be a combination of MSS (market stabilization scheme bonds) and sell-buy ​swaps. These two tools would be the least disruptive but are also associated with their own challenges," Gaura Sen Gupta, chief economist at IDFC First Bank said.

The RBI has been conducting overnight to 15-day reverse repos. Longer-tenor auctions see less interest as banks are reluctant to park funds for extended periods.