RBI Moves to Tighten Banking System Liquidity
The central bank plans ₹25,000 crore in bond sales and tighter daily cash reserve requirements as it withdraws surplus funds from banks.
The Reserve Bank of India (RBI) has announced another round of government bond sales worth ₹25,000 crore, or approximately $2.6 billion, to absorb excess liquidity from the banking system. The move comes as the central bank steps up efforts to bring short-term money-market rates closer to its policy repo rate.
The RBI will sell the bonds through open market operations (OMOs) on October 13, 2026. The securities cover maturities from fiscal 2030 to fiscal 2035, including government bonds carrying coupon rates ranging from 6.10% to 7.95%.
Separately, the central bank has raised the minimum daily cash reserve ratio (CRR) maintenance requirement for banks to 99% from 90%, effective October 16. Banks must maintain the prescribed average CRR over the reporting fortnight, but the higher daily requirement will reduce their flexibility to manage short-term cash balances.
The measures follow a period of substantial surplus liquidity in India's banking system. Liquidity had averaged more than ₹7 lakh crore since September 1, equivalent to around 2.6% of bank deposits. The surplus was boosted by dollar inflows under a special foreign-currency deposit mobilisation scheme.
The RBI sold government bonds worth ₹1 lakh crore in September, marking its largest net bond sale in more than a decade. The latest sale signals that the central bank intends to continue withdrawing surplus funds rather than allowing excess liquidity to keep short-term interest rates below its policy rate.
The RBI raised the benchmark repo rate by 25 basis points to 5.50% on October 7, its first rate increase in nearly four years. It also shifted its policy stance to calibrated tightening amid inflation concerns and strong economic growth. The latest liquidity measures reinforce that tighter policy direction.
Market participants expect the liquidity surplus to decline further in the coming months. ICICI Securities Primary Dealership has said the surplus could fall below 1% of deposits and potentially reach a range of 0% to 0.5% of deposits. Bond-market analysts have also noted that the RBI's bond sales have contributed to higher yields and a flattening of the yield curve.
For banks, the higher daily CRR requirement means less flexibility in managing reserve balances, while continued liquidity absorption could push overnight borrowing rates higher. The measures are designed to improve the transmission of the repo rate through money markets, although their effect on lending and deposit rates will depend on banks' funding conditions and market developments.