RBI Sells $406 Million in Bonds as Global Index Inclusion Drives Massive Inflows: Report

The Reserve Bank of India (RBI) has sold ₹34 billion ($406 million) worth of bonds in the secondary market. This sale is aimed at managing the excess cash in the banking system, which has increased due to inflows into Indian debt following the country’s inclusion in a global bond index. The RBI’s bond sales took place over four days, as reported in the central bank’s weekly statistical supplement.

Since India’s bonds were added to JPMorgan Chase & Co.’s emerging market bond index last month, foreign investments in local bonds have surpassed $1 billion in July. This has increased the liquidity in the rupee market, prompting the central bank to absorb the extra cash to bolster its reserves. During this period, the RBI added $9.7 billion to its reserves.

The banking system in India has shifted to a surplus liquidity position after being in deficit for most of the year. This change is attributed to government spending following the elections and the RBI’s actions. The excess liquidity that banks have deposited with the central bank currently stands at 1.4 trillion rupees, according to a Bloomberg Economics index.

India has become the 25th market included in the index since it began in June 2005. This inclusion is expected to attract between $20 billion and $25 billion in foreign inflows into the Indian bond market.

“Once liquidity in the banking system moves beyond 500 billion rupees surplus or deficit, the RBI tends to intervene. The last couple of weeks have seen a surplus larger than that, which could be problematic for the central bank if it continues,” said Alok Singh, head of treasury at CSB Bank.

Market traders are keenly awaiting the federal budget announcement on Tuesday to evaluate the government’s borrowing strategy for the fiscal year. The government plans to raise 14.1 trillion rupees through bonds for the financial year that began on April 1.