Scheduled for Monday, the RBI's variable-rate reverse repo with a 30-day term will be for 7 trillion rupees. That tenor is longer than its recent liquidity operations, which had run for up to 15 days, and is meant to hold more cash on the sidelines for longer.
In a variable-rate reverse repo, banks choose how much to place with the central bank, so it is a lighter touch than binding measures. As the RBI put it, "Participants will have an option for premature reversal of the amount lent in the above auction." The move targets a swelling cash pile that has pulled the weighted average call rate below the policy rate, loosening financial conditions more than policymakers likely prefer.
Excess liquidity has ballooned to a record 10.5 trillion rupees, per Bloomberg Economics, following the RBI's conversion of dollars gathered by banks from overseas Indians into rupees. The drive to attract foreign-currency deposits from the Indian diaspora brought in a record $127 billion, prompting the RBI to close that facility one month ahead of schedule in August.
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The RBI faces an uncommon challenge - excess liquidity with limited outlets - at the same time that rising global crude costs risk pushing inflation higher. Minutes from its August meeting show officials leaning toward tighter policy. Translation for savers and borrowers: if the central bank keeps nudging rates higher or drains liquidity more aggressively, short-term funding costs could edge up and deposit rates might not fall as quickly as you would expect in a glut.
