RBI to Sell ₹1 trillion of gilts in September as liquidity absorption shifts to OMO

The Reserve Bank of India today announced a ₹1-trillion open market operation sale of government securities in three tranches in September, moving to a durable liquidity absorption tool after several longer-tenor variable rate reverse repo auctions drew subdued demand.

The RBI will sell ₹500 billion on September 17, followed by ₹250 billion each on September 21 and September 28, through multi-security auctions using the multiple-price method. The first auction will offer a basket of government securities maturing between 2029 and 2032.

The move follows today’s comment by Governor Sanjay Malhotra that the central bank has a range of instruments available to withdraw the large liquidity surplus generated by foreign-exchange inflows under its swap programme.

"We have enough tools" to withdraw surplus liquidity, Malhotra said in a CNBC-TV18 interview, adding that VRRRs "may not help" sufficiently and that the RBI could use OMOs, swaps and other tools as necessary. He also said some liquidity would be absorbed naturally through currency demand, foreign-exchange market intervention, higher reserve requirements as credit expands and other autonomous factors.

The OMO announcement is therefore the clearest operational follow-through so far on the Governor's warning that the RBI would look beyond VRRRs to bring the weighted average call rate back towards the repo rate.

This is the first standalone OMO sale auction in nearly nine years, with the last such sale conducted in November 2017. The central bank had conducted several OMO sales in the secondary market since 2017, but in smaller quantities and not via auction mode.

The announcement also signals that the RBI is prepared to use a combination of instruments rather than rely exclusively on temporary liquidity operations. Malhotra had said the central bank would "not rule out anything", including MSS and cash management bills, while cautioning that it would remain conscious of the fact that incremental FCNR(B) deposits had been exempted from CRR requirements.

For bond markets, the immediate focus will be on demand for the first ₹500 billion tranche and the cut-off yields. A strong auction could allow the RBI to absorb a substantial part of the liquidity overhang without excessive disruption to the yield curve.