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India cenbank to retain cash surplus, may announce GSAP auction -sources

·2-min read
An attendant at a fuel station arranges Indian rupee notes in Kolkata

By Aftab Ahmed and Swati Bhat

NEW DELHI/MUMBAI (Reuters) - India's central bank is likely to retain a surplus of liquidity in the banking system and announce another round of bond purchases, but will avoid adding incremental cash in the near future, two sources said on Friday.

Funds parked with the Reserve Bank of India (RBI), in its reserve repo window, have averaged about 7 trillion rupees ($95 billion), while the government's cash balances with the central bank are about 3.4 trillion.

This fiscal year, the RBI has bought bonds worth 2.05 trillion rupees in auctions forming part of its government securities acquisitions programme (GSAP).

"All our objectives with surplus liquidity are not yet met," said a senior government source directly aware of the matter.

"For example, credit growth is not at desirable levels and this needs to increase, for which surplus liquidity is something we need," added the source, who asked not to be identified as he was not authorised to speak to media.

"Also the U.S. tapering could be bit more aggressive then we had expected so we want to ensure our market liquidity remains in surplus."

A banking source said the RBI was in no hurry to withdraw the existing surplus, and would probably unveil another GSAP round at a monetary policy review on Oct. 8.

"The RBI does not want to add to the surplus liquidity, at least, not immediately, but they will announce a GSAP 3.0, or possibly a calendar which could include simultaneous buying and sale of bonds that is liquidity neutral," said the source, who sought anonymity as the matter is a sensitive one.

The RBI did not immediately respond to a request for comment.

The government source added, "I expect RBI to keep liquidity neutral or positive, compared to current levels. So GSAP 3.0 should be announced. This is the time to push economic growth. We cannot sap liquidity from the market."

Most market participants expect the RBI to announce more bond purchases to help absorb the government's programme of borrowing to the tune of 12.06 trillion rupees.

"The RBI may not want to add to it any more, but we don't think they are going to undertake measures to permanently withdraw liquidity," said Suyash Choudhary, head of fixed income at IDFC Asset Management.

"We think the variable rate reverse repo program continues to get expanded: over time instruments of longer than 14 days may be introduced as well."

This week the U.S. Federal Reserve said it was likely to begin reducing monthly bond purchases as soon as November and signalled interest rate hikes could follow sooner than expected, as its turn away from pandemic crisis policies gains momentum.

($1=73.7410 rupees)

(Reporting by Swati Bhat; Editing by Clarence Fernandez)

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