India’s central bank aims to drain two trillion rupees ($27.4 billion) from the banking system on Friday, in an auction that will provide traders essential clues on where the monetary authority wants to nudge short-term rates. The cutoff for the 14-day reverse repurchase operation, conducted for the first time since the March pandemic-driven volatility, will let traders know just how much higher the Reserve Bank of India wants to drive money-market rates. The RBI is draining excess cash after money-market rates crashed below its interest-rate corridor late last year, spurring calls from investors for it to remedy a situation that could distort banks’ asset pricing. Too sharp a rise could drive volatility, though, and raise concerns that the central bank is withdrawing stimulus support.
“The market will watch closely what cutoff the RBI gives,” said Pankaj Pathak, fixed-income fund manager at Quantum Asset Management Ltd. in Mumbai. If it’s closer to the 4 per cent upper bound of the interest-rate corridor than the lower bound at 3.35 per cent, then the central bank “clearly wants shorter-term rates higher,” he said. The cutoff rate is most likely to be 3.50 per cent, according to the median estimate of seven traders polled by Bloomberg. Shorter bonds sold off after the RBI’s announcement of the operation last week, as the market interpreted it as the start of a sooner-than-anticipated withdrawal of ultra-loose liquidity accommodation. The RBI has since met with bank executives to assure them that easy policy will continue.