The move comes after the central bank’s second attempt to mop up liquidity via longer tenure variable rate reverse repo (VRRR) auction met with a muted response.
The net liquidity in the banking system was in a surplus of Rs. 10.43 trillion on Thursday, latest data by the RBI showed, the core liquidity is estimated around Rs 13 trillion to Rs 14 trillion. The OMO sales is aimed to suck out durable liquidity while VRRR auctions are for transient money.
During an interview to private television channel CNBC-TV18, Malhotra while answering a question on tools that can be deployed to suck out the liquidity, Malhotra said, “We have enough tools,” while mentioning OMOs and swaps, and that VRRR may not be of much help.
When specifically asked on hiking banks’ cash reserve ratio requirement, Malhotra though said ‘nothing is off the table’ but added RBI is conscious of the fact CRR was exempted from FCNR (B) deposits mobilised though the concessional swap window. The current liquidity surplus in the system is mainly due to the $127 billion FCNR(B) deposit mobilisation.
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Malhotra said the overall goal remains to align the operating target of monetary policy, the weighted average call rate, with the repo rate.
The overnight weighted average call rate (WACR)- was trading near the Standing Deposit Facility (SDF) rate to settle at 5.02 per cent, against the previous close of 4.98 per cent on Thursday. Malhotra noted that the WACR is low because of the surplus liquidity. If the six member rate setting panel hike interest rate in the next meeting scheduled 5-7 October – as a section of the market expects - then RBI has to ensure WACR moves closer to the repo rate which is at 5.25 per cent, so that monetary transmission become effective.
“Now we strongly advocate a 25-bps rate hike in the upcoming October policy, followed by another in December in quick succession,” said Soumya Kanti Ghosh, Group Chief Economic Adviser State Bank of India, in a note citing incipient signs of generalization of CPI inflation.
Market participants said the OMO sales are expected to push bond yields further north.
The yield on the benchmark 10-year government bond jumped 5 bps to settle at 7.01 per cent. It has breached the 7 per cent mark for the first time since 3 June 2026. The 5-year yield also hardened by 7 basis points to settle at 6.59 per cent.
“We believe 10 year yields should move up towards 7.15% or even higher tracking multiple cues,” the SBI note said.
The OMO sale auctions will be conducted for Rs. 50,000 crore on September 17, followed by Rs. 25,000 crore each on September 21 and September 28. The central bank will use a multi-security auction under the multiple price method, offering six government securities for the first auction, in the 3 year and 5 year category.
"With the RBI now signalling that it will use OMO sales alongside VRRR and swaps to manage liquidity, the 10-year yield is likely to trade in the 6.98-7.05 per cent range in the near term," said a dealer at a state-owned bank.
A section of the market was expecting OMOs in the shorter end as reflected by the ballooning short position on the 5 year bond.
