Banks tap RBI's first cash auction in 3 months as market rates spike

The Reserve Bank of India's first liquidity infusion in more than three months drew robust demand from banks on Monday, as overnight borrowing rates held near the ceiling of the monetary policy corridor.

The operation comes after several months of the central bank absorbing surplus liquidity that hit a record high ‌due to hefty inflows from diaspora deposits mobilised to defend a weak rupee.

Large sustained surpluses risk worsening inflation and lifting asset prices.

However, interbank short-term borrowing costs rose sharply in recent weeks after the RBI raised rates for the first time in nearly four years earlier this month and signalled further tightening ahead in the face of rising inflation.

Monday's operation saw the central bank infuse ₹1 trillion ($10.53 billion) through a seven-day variable rate repo operation, ‌attracting bids worth more than ₹1.5 trillion ahead of a large tax outflow.

"It (RBI's infusion) is a symptomatic response to volatility in liquidity conditions," said Sakshi Gupta, an economist at HDFC Bank.

"As liquidity surplus has normalised, we are back to fine-tuning ‌operations and further durable liquidity absorption measures like open market sale ‌of bonds or foreign exchange sell/buy swaps may not be needed further."

The ‌weighted average interbank call money rate ended above the Marginal Standing Facility rate for the first time in this financial year on Friday, and was close to that level on Monday.

The central bank's repo rate was at 5.50% and the MSF rate at 5.75%.

India's banking system liquidity surplus eased below ₹2 trillion to 0.7% of deposits as of October 16, for the first time ‌in two-and-a-half months.

"Since Tuesday is a holiday, we will witness a large chunk of goods and services tax outflows today itself, which must have necessitated a timely intervention," a trader with a private bank said.