India’s central bank has informally contacted some bond traders to gauge what level of short-term borrowing costs would be comfortable to the market, according to people familiar with the matter, following a selloff sparked by concerns of liquidity withdrawal.

Officials at the Reserve Bank of India reached out to traders at some banks in recent days asking for feedback on the cost of overnight borrowing — known as the weighted average call rate, the people said, asking not be identified discussing private matters. The general feedback was that any moves should not be overly disruptive to liquidity, the people said.

The RBI did not immediately respond to an email seeking comment on the matter.

The outreach follows a volatile week in India’s bond market, where five-year sovereign bond yields jumped by 25 basis points. Investors were spooked after the RBI’s surprise shift from accommodative to neutral stance on June 6, sparking fears of tighter funding conditions.

Adding to market anxiety was the trend of the overnight borrowing rate, which has been hovering about 20-25 basis points below the central bank’s main policy rate over the past three weeks, mainly due to excess cash in the system. This effectively eased financial conditions beyond what the central bank had signaled via its rate cuts since February. 

Investors interpreted the stance shift as a possible signal that the RBI may act to withdraw some of the excess liquidity and bring the overnight rates back in line with the policy rate. 

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Published on June 16, 2025