The Reserve Bank of India has announced its largest annual net sale of government securities in more than ten years, signalling a shift towards tightening monetary policy amid rising bond sales and increased government borrowing.
India’s central bank has carried out its largest annual net sale of government bonds in more than a decade, underscoring how aggressively it is draining excess cash from the financial system. Treasury officials said the Reserve Bank of India has already sold a net ₹1 trillion of debt in the current financial year, and market participants now expect that total to rise sharply before December.
The move comes as the RBI works to remove surplus rupee liquidity created by its special foreign-currency deposit measures, which drew dollars into the system and helped support the rupee and preserve foreign-exchange reserves when oil prices were climbing. But the side effect has been to push overnight money-market rates below the policy repo rate, complicating the central bank’s efforts to keep financial conditions aligned with its monetary stance. Business Standard reported that the RBI has outlined net open-market sales of government securities worth ₹1 trillion in three tranches, its first large-scale net bond sale in two years.
Bond traders say the central bank’s actions are likely to continue. Alok Sharma, head of treasury at ICBC, said he would prefer to cut exposure to long-dated bonds rather than add to holdings, and expects another ₹1 trillion of open-market sales or a rise in the cash reserve ratio, the share of deposits banks must keep with the central bank. Harsimran Sahni, head of treasury at Anand Rathi Global Finance, said he sees an additional ₹1 trillion to ₹1.5 trillion of bond sales in October and November, depending on liquidity conditions.
The tightening bias is feeding into government debt markets at a time when investors had hoped for relief. Selling has spread across the yield curve after the government increased borrowing through 15-year, 30-year and 40-year securities in its second-half borrowing plan, while higher state issuance is also expected to add pressure. Vikas Garg, head of fixed income at Invesco Mutual Fund, said the extra supply could keep term premium elevated in the near term, even as the curve begins to flatten at the shorter end if the RBI keeps draining liquidity and recalibrating rates. A federal finance ministry official said net borrowing remains within budgeted levels and that the government is sticking to fiscal prudence.
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