A blazing rally in India’s short-end bonds, driven by plans to attract foreign capital, may fizzle out because the central bank is expected to drain excess cash from the financial system, according to analysts.BofA Securities and Bandhan AMC Ltd. expect the Reserve Bank of India to step up short-term cash withdrawal operations in coming months as surplus banking liquidity is seen climbing to pandemic-era levels of about 8 trillion rupees ($85 billion). DBS Bank Ltd. expects the central bank to deploy a stronger tool in August by requiring banks to keep a larger proportion of deposits with the RBI.
There isn’t “much room for short-end bonds to rally because if you account for the maturity of the RBI’s short dollar forward book and a potential cash reserve ratio hike, you won’t have that much surplus liquidity left in the system,” said Ashhish Vaidya, head of treasury at DBS, referring to sales of the US currency the RBI has committed to in coming months. Such sales reduce rupee liquidity with local banks.
