India’s short-term money market faces upward rate pressures as the Reserve Bank of India’s bond sales and GST outflows reduce surplus liquidity, signalling a potential shift in monetary conditions amid persistent bond market concerns.
India’s short-term money market is beginning to feel the effect of the Reserve Bank of India’s efforts to drain excess cash, with the overnight weighted average call rate rising towards the policy repo rate as bond sales and tax outflows trimmed liquidity. On Monday, the benchmark rate settled at 5.24 per cent, above Friday’s 4.92 per cent, after the RBI’s open market operations and goods and services tax-related withdrawals reduced the surplus sitting in the banking system.
According to the Business Standard report, net liquidity hovered near ₹6 trillion from Friday through Sunday, down sharply from a peak of ₹11.16 trillion in the first week of September. The RBI began conducting bond sales from September 18 as part of a wider effort to absorb the durable liquidity created by earlier foreign currency non-resident bank inflows through its dollar-rupee swap window, which opened on June 8 and closed early on August 31.
The second auction drew strong interest, with bids of ₹84,942 crore against a notified amount of ₹25,000 crore, suggesting banks and investors still have appetite for government paper even as the central bank tightens liquidity conditions. A senior primary dealer told the newspaper that the move in rates reflected a combination of the RBI’s operations and GST outflows, adding that the call rate is now closer to the repo rate and broadly aligned with it.
Market participants, however, said the shift may prove temporary. Treasury officials quoted by the paper said a fresh round of bond sales could be needed if liquidity stays high, while analysts warned that the durable surplus, estimated at about ₹13 trillion, may take until the second quarter of FY28 to disappear. That task is unfolding alongside a difficult backdrop for debt markets, with large government and state borrowing, softer foreign demand and the risk that 10-year bond yields could edge higher.
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