RBI says no plan to retire FX fwd contracts to ease liquidity

SRINAGAR, India (Reuters) - The RBI has no plans to retire foreign currency forward contracts to meet the liquidity deficit in the financial system and would instead consider bond purchases and other measures, the governor said.

Duvvuri Subbarao has previously said that the RBI does not use forex intervention to manage liquidity as a matter of policy, but on Thursday he specifically ruled out redeeming the country's outstanding foreign debt to bridge the cash deficit.

"There are uncertainties about liquidity in the system. We will try to manage that actively," Subbarao told reporters after the Reserve Bank of India's board meeting in Srinagar.

"We do not use forex intervention as a measure of managing liquidity," he then added.

His comments come as India's persistent tight liquidity deficit has worsened this week. Banks borrowed 1.05 trillion rupees on Thursday from the central bank, the third consecutive day where repo borrowings have surpassed the 1 trillion rupees mark.

The RBI had net outstanding forward dollar sales of $12.1 billion in February, down from $12.8 billion in January, according to its data.

Bond markets have rallied this week on hopes the RBI would consider more bond purchases after buying nearly 100 billion rupees worth of debt via open market operations on Tuesday.

Subbarao underpinned some of these hopes, saying the central bank will consider OMOs as part of the potential measures available to manage liquidity.

The 10-year bond yield was trading at a 33-month low of 7.62 percent.

Last week, the RBI cut the repo rate by a quarter percentage point, but left unchanged the cash reserve ratio (CRR), or the proportion of cash banks need to park with the RBI.

(Reporting by Manoj Kumar; Writing by Neha Dasgupta; Editing by Sanjeev Miglani)