The overnight WACR — the operating target of the RBI’s monetary policy — settled at 5.24 per cent on Monday, against the previous close of 4.92 per cent as the central’s open market operation (OMO) sales and goods and services tax (GST)-related outflows helped absorb surplus liquidity from the banking system. The RBI decided to conduct the OMOs of bond sales to soak up surplus liquidity starting September 18.
The net liquidity in the banking system hovered around ₹6 trillion between Friday and Sunday, according to the latest data released by the RBI. The liquidity had peaked at ₹11.16 trillion during the first week of September.
The second OMO auction today received robust demand with bids worth ₹84,942 crore against a notified amount of ₹25,000 crore.
“Mostly the OMO has had a bit of an impact, and the GST outflow has also been there. So, I think it is a mix of both. The call rate is actually closer to the repo rate and aligned with it,” said a senior executive at a primary dealership.
The RBI has announced OMO sales worth ₹1 trillion for September as it seeks to withdraw a part of the durable liquidity surplus that had built up following large foreign currency non-resident (bank), or FCNR(B), inflows under its dollar-rupee swap window which opened on June 8 and closed ahead of schedule on August 31 this year. The central bank has also conducted longer-tenor variable rate reverse repo (VRRR) operations to absorb the more temporary component of the surplus.
Market participants said the improvement in money-market rates would need to be assessed over the coming weeks as liquidity conditions could change with the reversal of some month-end outflows and further OMO operations.
“Whether the levels will hold at these levels or whether it is further going down after the further OMOs, we have to see,” said the treasury head at a private bank. “Another OMO could be considered if liquidity remains elevated,” the person added.
Bank treasury officials said another OMO of around ₹1 trillion could be sufficient over the coming months, while a further reduction in liquidity could come from the increase in currency in circulation (CIC) and cash reserve requirements as the deposit base expands.
Gaura Sen Gupta, chief economist at IDFC FIRST Bank, said the durable liquidity surplus which is currently around ₹13 trillion could take until the second quarter of 2027-28 (Q2FY28) to be absorbed.
The increase in currency in circulation (CiC) and the rise in reserve requirements as the deposit base expands could absorb a part of the surplus over the coming months.
Gupta said the RBI is likely to use OMO sales and sell-buy swaps to deal with the more durable component of excess liquidity. While the central bank has already conducted short-term sell-buy swaps, longer-tenor swaps could also be considered.
The liquidity withdrawal is taking place against a challenging backdrop for the government bond market. Net supply of government securities (gsecs) and state development loans (SDLs) is estimated at ₹12.5 trillion in the second half (H2) FY27, compared with ₹9.2 trillion in H1. Demand for gsecs and SDLs could fall short of supply by around ₹4 trillion in FY27, said experts.
Additional OMO sales by the RBI could add to the supply pressure, particularly at a time when foreign portfolio investor (FPI) demand for government bonds has slowed down.
Market participants said the 10-year government bond yield could move towards 7-7.25 per cent amid higher supply, possible monetary tightening and elevated global bond yields.
The yield on the 10 year bond ended at 7.05 per cent on Monday, down 2 basis points from its previous close.
 "RBI")