RBI has announced OMO sales in Sep-26, after mopping up excess liquidity through VRRR in Aug-26
Download ReportQuantEco Research | MARKET Musings - Managing the liquidity glut
With banking system liquidity surplus far exceeding the comfort threshold, the RBI initiated sterilization of excess liquidity via VRRRs in Aug-26. Along expected lines, the RBI has now turned towards more durable tools – and introduced Outright OMO sales of Rs 1 tn (amount to be spread over three auctions between Sep 17th, Sep 21st, and Sep 28th). The combination of SDF, VRRRs and the announced OMO sales will enable the RBI to sterilize Rs ~10 tn worth of excess liquidity from the banking system. As per our estimates, this leaves space for another Rs 2 tn worth of immediate sterilization need, which could be met through short-dated Sell/Buy FX Swaps and/or issuances of MSS securities/CMBs. We do not expect any form of CRR hike and/or a further extension of OMO sale, for now. From a market’s perspective, the announced OMO sale will increase duration pressure just ahead of the heavy H2 FY27 borrowing calendar and weigh upon sentiment. We retain our call for a cumulative 50 bps repo rate hike across the Dec-26 and Feb-27 policy reviews, 10Y g-sec yield of 7.25%, and 1s2s g-sec spread compression to 20 bps before the end of FY27.