The Reserve Bank of India has introduced new measures to absorb excess cash from the country's banking system. On Friday, the central bank announced plans to conduct open market bond sales while simultaneously tightening the rules surrounding how lenders manage their cash reserve obligations. These actions follow a recent increase in the benchmark policy rate, which was raised for the first time in almost four years, accompanied by indications that further rate increases could follow.
Under the new framework, the monetary authority will sell 250 billion rupees, equivalent to 2.58 billion dollars, in government securities on Tuesday. In addition to the upcoming open market auction, regulatory rules regarding the cash reserve ratio have been adjusted. Starting October 16, commercial financial institutions must maintain 99 percent of their daily cash reserve requirement with the central bank, up from the previous mandatory threshold of 90 percent.
These operational changes targeted at liquidity follow a month in which the central bank offloaded 1 trillion rupees in sovereign paper, marking its largest net bond sale in more than ten years. At present, commercial lenders keep 3 percent of their overall deposits with the monetary authority to satisfy the cash reserve ratio, and these specific funds do not generate any interest income for the participating institutions.
The aggressive absorption measures directly impact the commercial banking sector, which has been operating with significant extra cash. Since September 1, the average daily liquidity surplus across the domestic financial network has surpassed 7 trillion rupees, or 72.37 billion dollars. This surplus currently represents about 2.6 percent of total bank deposits, creating conditions that the central bank is actively seeking to alter through its market operations.
Explaining the broader environment, RBI Governor Sanjay Malhotra noted that the current elevation in system cash is not expected to persist over an extended duration. He stated that a substantial portion of this extra liquidity will naturally be absorbed before the conclusion of the current financial year in March. The policy decision itself did not contain explicit liquidity measures, making Friday's announcement the primary mechanism for execution.
Looking at market consequences, ICICI Securities Primary Dealership pointed out that open market bond disposals have caused a bear flattening across the yield curve. The primary dealer noted that financial markets must brace for the overall liquidity surplus to shrink significantly, projecting that excess cash could drop below 1 percent of deposits and potentially settle between 0 percent and 0.5 percent in upcoming quarters.
The upcoming open market transaction will involve government paper scheduled to mature between fiscal year 2030 and fiscal year 2035. Specific instruments designated for the Tuesday sale include the 7.88 percent 2030 bond, the 6.10 percent 2031 bond, the 7.95 percent 2032 bond, two separate 2033 issues carrying coupons of 7.26 percent and 7.18 percent, and the 7.10 percent 2034 note.
Key numbers
- Planned bond sales: 250 billion rupees
- New daily CRR maintenance level: 99%
- Daily liquidity surplus since Sept 1: Over 7 trillion rupees
- Previous month bond sales: 1 trillion rupees
- CRR deposit allocation: 3%
What a board might note
- How might the increase in the daily CRR maintenance requirement to 99% starting October 16 affect short-term treasury management and working capital lines at commercial banks?
- Does the projected decline in liquidity surplus to 0%-0.5% of deposits, as forecast by ICICI Securities Primary Dealership, risk pushing up corporate borrowing costs?
- How could the bear flattening of the yield curve resulting from RBI bond sales impact corporate debt issuance plans for papers maturing between fiscal 2030 and fiscal 2035?
- Will the central bank's goal to absorb excess liquidity before the financial year ends in March lead to tighter domestic credit availability for corporate borrowers?
Source: Economic Times, 10 October 2026. This is a summary of a news report, published as general information. It is not legal, tax or investment advice.
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