India’s central bank has sold ₹34 billion ($406 million) worth of bonds in the secondary market. This move is likely aimed at absorbing the excess liquidity in the banking system, which is a result of the increased inflows into the country’s debt following its inclusion in a global index, as reported by Bloomberg.
The Reserve Bank of India’s bond sales occurred over four days, according to the monetary authority’s weekly statistical supplement.
Foreign investments in local bonds have surpassed $1 billion so far in July following the inclusion of India’s bonds in JPMorgan Chase & Co.’s flagship emerging market bond index late last month. This has increased local rupee liquidity, as the central bank absorbed the inflows to boost reserves. The RBI added $9.7 billion to its reserves that week, the data showed.
India’s banking system liquidity has shifted to a surplus after being in deficit for most of the year, due to government spending post-elections and the central bank’s actions. Excess liquidity that banks deposit with the central bank stood at 1.4 trillion rupees, according to a Bloomberg Economics index.
India became the 25th market to be included in the index since its inception in June 2005. This inclusion is expected to attract global inflows of $20 billion to $25 billion into the Indian bond market.
“Once liquidity in the banking system moves beyond 500 billion rupees surplus or deficit, the RBI tends to intervene. The last couple of weeks has seen a surplus bigger than that, which could be bothersome for the central bank if it stays like that,” said Alok Singh, head of treasury at CSB Bank.
Market traders are eagerly anticipating the federal budget on Tuesday to assess the government’s borrowing strategy for the fiscal year. The government plans to borrow 14.1 trillion rupees through bonds in the financial year that commenced on April 1.
