Contrary to bond traders' expectations, RBI is trying to remove cash

The Reserve Bank of India will hold a reverse repo auction of Rs 250 billion of 63-day duration on today

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 Rs 250 billion 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 Rs 7.1 trillion this fiscal year, Singh said.

The RBI bought a record Rs 3 trillion 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.”