While the cash removal isn’t expected to immediately make a dent, thanks to the easy liquidity conditions, investors are concerned that the reduction in debt purchases by the central bank would remove a key support at a time when the government plans to borrow a record Rs 7.1 trillion this fiscal year, Singh said.
bought a record Rs 3 trillion of debt in the year ended March, helping cool bond yields, and has since spent a further 500 billion rupees on such purchases. It also introduced a forex swap tool to inject rupee liquidity as an alternative to debt buys.
Slowing economic expansion and a widening shadow banking crisis have led to calls for more liquidity, leading to some traders speculating that the RBI
will move to a reverse repo mode, pulling inter-bank rates lower.
“This seems to be a way to exert greater control in rates out to the three-month tenor,” said Eugene Leow, a rates strategist at DBS Bank in Singapore. “It is probably needed in order to handle the liquidity surplus that has been built up over the past few weeks.”