Indian Rupee: RBI move tightens liquidity – BNY

BNY’s Geoff Yu notes that India’s bonds sold off after the Reserve Bank of India (RBI) unexpectedly advanced closure of its special Dollar deposit window to end-August. The change reduces anticipated Indian Rupee (INR) liquidity, lifts 5-year and 10-year yields, and may slow reserve accumulation and Rupee appreciation as authorities grow wary of future liabilities and forward-premium costs.

Early window closure hits bonds

"India’s bond market sold off after the Reserve Bank of India (RBI) unexpectedly brought forward the closure of its special dollar deposit window for overseas residents, reducing the amount of rupee liquidity investors had expected to enter the system."

"The facility, which has already attracted more than $50bn, will now close at the end of August rather than a month later. 5y yields rose as much as 9bp to 6.44%, while the 10y yield climbed 4bp to 6.80%."

"The earlier closure could also slow further reserve accumulation and limit rupee appreciation after reserves rose above $700bn."

"The move suggests the RBI is becoming more sensitive to the future liability and forward-premium costs associated with sustaining the scheme."