India's central bank announced plans to withdraw excess liquidity from the banking system, a move likely aimed at stemming the recent slide in overnight borrowing costs.
The Reserve Bank of India said in a statement it will drain 1 trillion rupees ($11.7 billion) on July 4 via a seven-day variable reverse repurchase auction. Through such moves, the central bank absorbs surplus funds from banks in exchange for eligible securities.
The RBI's policy framework seeks to keep overnight borrowing costs aligned with the benchmark repurchase rate, currently at 5.5%, by injecting or absorbing liquidity as needed.
The latest measure to drain excess cash aims to correct persistent deviations — overnight rates have stayed below the policy rate for a few months — raising concerns over the effectiveness of monetary policy signaling. Prolonged low rates could also risk reigniting inflationary pressures. The announcement follows the RBI's recent withdrawal of 850 billion rupees from the banking system via a 7-day auction.
Surplus liquidity, as measured by excess funds banks park with the RBI, rose to a three-year high of 3.9 trillion rupees ($45.4 billion) as on July 2, according to Bloomberg index showed.
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