India’s Central Bank Is Trying to Drain Cash

(Bloomberg) -- Indian bond traders who were expecting the central bank to keep the cash spigot open may have to rework their calculations.

The Reserve Bank of India will hold a reverse repo auction of 250 billion rupees of 63-day duration on Wednesday, the first such move to use the tool for a longer duration to drain cash. It will hold additional rounds if needed, the central bank said late Tuesday evening.

“The market will read it as no open-market operations by the RBI for now,” said Naveen Singh, head of fixed-income trading at ICICI Securities Primary Dealership in Mumbai.

While the cash removal isn’t expected to immediately make a dent, thanks to the easy liquidity conditions, investors are concerned that the reduction in debt purchases by the central bank would remove a key support at a time when the government plans to borrow a record 7.1 trillion rupees this fiscal year, Singh said.

The RBI bought a record 3 trillion rupees of debt in the year ended March, helping cool bond yields, and has since spent a further 500 billion rupees on such purchases. It also introduced a forex swap tool to inject rupee liquidity as an alternative to debt buys.

Slowing economic expansion and a widening shadow banking crisis have led to calls for more liquidity, leading to some traders speculating that the RBI will move to a reverse repo mode, pulling inter-bank rates lower.

“This seems to be a way to exert greater control in rates out to the three-month tenor,” said Eugene Leow, a rates strategist at DBS Bank in Singapore. “It is probably needed in order to handle the liquidity surplus that has been built up over the past few weeks.”

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