RBI Takes Surprise Action to soak up liquidity

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The Reserve Bank of India (RBI) on Saturday unexpectedly ordered banks to deposit their extra cash with it, in a bid to absorb excess liquidity generated by a government ban on larger banknotes. Many Indians deposited their old notes with their banks after the ban on 500 and 1,000 rupee notes ($7.30-$14.60) on Nov. 8, which is aimed at tax evaders and counterfeiting. 

Banks had put some of this cash into government bonds, sparking a rally that saw the benchmark 10-year bond yield fall more than 50 basis points to its lowest in more than 7-1/2 years. The central bank said banks would need to transfer 100 percent of their cash under the RBI's cash reserve ratio from deposits generated between Sept. 16 and Nov. 11, saying it was a temporary measure that would be reviewed on or before Dec. 9. 

Traders called it a drastic move intended to dent the rally in bond markets, adding that the RBI could have opted for more modest measures such as sucking out some of the liquidity through sales of market stabilisation bonds or telling banks to park funds under reverse repos.