Commerzbank’s India analysis says the Reserve Bank of India is intensifying liquidity absorption through INR1trn of government bond sales, alongside continued VRRR operations, FX swaps and open-market actions, to pull money-market rates towards the 5.25% policy rate. Foreign investors net sold USD201.7mn of government bonds after USD503.1mn last Friday, the biggest one-day outflow in five months, following the RBI’s announcement that it would sell securities from its portfolio.
The liquidity surplus is put at about INR10trn, the highest since late 2021, supported partly by roughly USD127bn raised via special foreign-currency schemes including FCNR(B) deposits, while ECB and OFCB were also cited. The RBI is set to issue INR500bn today, then INR250bn on both 21 and 28 September; the first auction is weighted to the short and intermediate curve, and pairs maturities with FCNR(B) liabilities. Bond sales are presented as more durable than VRRR, where an INR1tn auction drew INR403bn; the INR1trn programme would absorb around one-tenth of the surplus. Despite yields rising, with the 5Y up 24bp to 6.76%, USD/INR held near 95.96 as the RBI reportedly sold dollars, and the policy rate is expected to remain unchanged on 7 October.
Positioning for Yield Curve and Money-Market Rate Shifts
We advise derivative traders to position for a flatter Indian yield curve in the coming weeks as the central bank aggressively drains banking system cash. With the five-year government bond yield already climbing 24 basis points to 6.76%, shorter-term yields will continue to face upward pressure ahead of the October 7 policy meeting. We recommend entering payer positions on short-to-medium term Overnight Indexed Swaps (OIS) to capitalize on this upward shift as money-market rates align with the 5.25% policy rate.
Strategies in Currency Derivatives and Bond Futures
In the currency derivatives space, we suggest selling volatility or utilizing option spread strategies on the USD/INR pair. Despite global crude oil prices hovering near volatile highs, the central bank’s heavy dollar-selling interventions have kept the exchange rate tightly bound near the 95.96 level. Historical intervention patterns show that the Reserve Bank of India will likely defend this threshold using its massive foreign reserves, making range-bound strategies highly profitable.
Traders should also prepare for continued selling pressure in the debt market as foreign investors recently offloaded a substantial USD 201.7 million of government bonds in a single day. Since the upcoming bond auctions on September 21 and September 28 will absorb more banking liquidity, we expect short-term bond futures to see further price declines. We recommend shorting near-term government bond futures to align with these impending supply shocks and the ongoing liquidity withdrawal.
