EconomyRBI says bond sales and FX swaps are on the table to drain excess banking liquidity
A liquidity surplus above ₹10 trillion is pushing overnight rates below the repo rate, forcing the central bank to think beyond routine absorption operations.
THE INDIQA Research DeskPublished 11 Sept 2026Updated 12 Sept 20261 min read
Reserve Bank of India Governor Sanjay Malhotra said the central bank has multiple tools available to drain excess liquidity, including open-market bond sales and foreign-exchange swaps.
The banking system's liquidity surplus has risen above ₹10 trillion, Reuters reported. When surplus cash becomes too large, overnight money-market rates can fall below the policy repo rate and weaken monetary-policy transmission.
The RBI's challenge is therefore two-sided: support financial stability and currency management while ensuring that short-term market rates remain aligned with the policy stance. Bond sales, variable-rate reverse repos and FX swaps can all affect the amount of rupee liquidity in the system.
CIVIL SERVICES VIEWStudy this development
GS-IIIMonetary policy transmission and liquidity managementPrelims: HighMains: High
Why this matters
The RBI governor said bond sales and FX swaps could be used to manage a very large liquidity surplus.
Key facts
- Open-market operations involve RBI transactions in government securities.
- An FX swap can change rupee liquidity without changing the policy repo rate.
Key terms
- RBI
- liquidity
- OMO
- FX swap
- repo rate
Arguments, challenges and policy responses
- Monetary-policy transmission
- Managing liquidity created by capital and FX flows
- Balancing inflation and financial stability
India’s context
Liquidity conditions influence deposit rates, lending rates, bond yields and the rupee.
Keep in mind
Liquidity management operations are not identical to a change in the policy rate.
Practice question
Explain how excess banking liquidity can weaken monetary-policy transmission and how the RBI can respond.
Revision summary
- Open-market operations involve RBI transactions in government securities.
- An FX swap can change rupee liquidity without changing the policy repo rate.
- Monetary-policy transmission
- Managing liquidity created by capital and FX flows
- Balancing inflation and financial stability
DISCUSSION & EDITORIAL REVIEW
Join the discussion
Comment on the story, report a factual or editorial issue, or tell us whether the article was useful.
Comments
Public comments appear after editorial review.
Was this article useful?
Tell us in one tap. Details are optional.
Report a problem with this article
