The Reserve Bank of India will conduct its biggest-ever 15-day variable rate reverse repo auction on August 31 as it seeks to withdraw excess liquidity from the banking system. Meanwhile, the 10-year government bond yield rose to 6.91%, while the rupee strengthened to ₹95.39 against the US dollar.
Mumbai : The Reserve Bank of India (RBI) is set to conduct a 15-day Variable Rate Reverse Repo (VRRR) auction worth ₹6 trillion on August 31, marking the largest-ever auction of this kind by the central bank. The move comes as the RBI looks to absorb surplus liquidity from the banking system and keep short-term money-market conditions aligned with its monetary policy stance.
The auction is significantly larger than the current level of excess liquidity in the system. Banks had parked around ₹3.75 trillion of surplus funds with the RBI through the liquidity adjustment facility on Thursday.
RBI Chooses VRRR to Manage Excess Liquidity
The VRRR auction allows the RBI to temporarily absorb excess funds from banks. Unlike an increase in the Cash Reserve Ratio (CRR), which requires banks to maintain a higher portion of their deposits with the central bank without earning interest, the VRRR mechanism is generally considered a less disruptive way of managing liquidity.
Market participants believe the timing of the auction is particularly important as banks and companies are expected to see significant fund outflows related to advance tax payments.
A bond market trader said the move was less disruptive compared with using an incremental cash reserve ratio approach.
RBI Could Be Preparing the Ground for Future Rate Action
The liquidity-management move also comes against the backdrop of a more cautious monetary policy outlook.
Following the relatively hawkish tone of the minutes of the RBI’s August Monetary Policy Committee (MPC) meeting, some market participants expect the central bank could begin raising interest rates as early as October.
Draining surplus liquidity before any potential rate increase could help ensure that changes in the policy rate are transmitted more effectively through the banking and financial system.
₹3 Trillion VRRR Auction Receives ₹1.52 Trillion in Bids
The RBI had conducted a three-day VRRR auction on Friday for ₹3 trillion. The auction received bids worth around ₹1.52 trillion, with the cut-off rate settling at 5.24%.
Meanwhile, the Weighted Average Call Rate (WACR), which serves as the operating target of monetary policy, ended at 5.22%, compared with 5.21% in the previous session.
The upcoming ₹6 trillion auction will therefore be closely watched by banks, bond traders and money-market participants for indications about the RBI’s liquidity-management strategy.
10-Year Government Bond Yield Rises to 6.91%
Government bond prices came under pressure on Friday as traders remained cautious ahead of the speech by US Federal Reserve Chair Kevin Warsh at the Jackson Hole economic symposium.
The benchmark 10-year government bond yield rose to 6.91%, its highest level since June 11, compared with 6.89% in the previous session.
Market participants were particularly focused on the US Federal Reserve’s signals regarding the future direction of US interest rates. Any indication of tighter monetary policy could influence global bond yields, capital flows and emerging-market currencies, including the Indian rupee.
A primary-dealership trader said the benchmark yield could move towards 6.95% from current levels depending on developments in global interest-rate expectations.
Bond Yields Rise During the Week
The rise in yields was not limited to Friday’s session.
During the week:
- The benchmark 10-year government bond yield increased by 6 basis points.
- The 5-year government bond yield rose by 5 basis points.
- The 10-year benchmark yield ended the week at 6.91%.
Higher bond yields generally indicate falling bond prices and reflect changing expectations around interest rates, inflation, government borrowing and global financial conditions.
Rupee Strengthens to ₹95.39 Against Dollar
While the bond market remained under pressure, the Indian rupee received support from RBI intervention and declining crude oil prices.
The rupee closed at ₹95.39 per US dollar on Friday, compared with ₹95.55 in the previous session. The currency therefore gained around 0.34% against the dollar during the week.
Dealers said the rupee continued to face pressure from month-end dollar demand from importers. However, RBI intervention through dollar sales helped contain volatility and provided support to the domestic currency.
RBI Dollar Sales Help Support the Rupee
According to market participants, the central bank supplied dollars to the market during the week to meet demand from importers and prevent excessive volatility in the exchange rate.
The RBI’s intervention comes at a time when India is receiving significant foreign-currency inflows through special facilities linked to FCNR(B) deposits and other foreign-currency funding arrangements.
The central bank has also been using incoming dollar flows to manage volatility in the foreign-exchange market.
FCNR(B) Swap Facility Attracts $72.85 Billion
The RBI recently expanded access to its concessional dollar-rupee swap facility for Foreign Currency Non-Resident (Bank), or FCNR(B), deposits.
On Thursday, the central bank allowed banks to access the facility outside their designated weekly window for transactions exceeding $100 million.
According to the latest RBI data, the swap facility had attracted total inflows of approximately $72.85 billion as of August 21.
These foreign-currency inflows are providing additional support to India’s external liquidity position and helping the RBI manage pressure on the rupee.
Rupee Still Down Sharply Since West Asia Conflict
Despite its recent stability, the rupee remains weaker over the longer period.
The Indian currency has depreciated around 4.62% against the US dollar since the beginning of the West Asia conflict in late February. However, it has remained relatively stable during August.
Lower crude oil prices could provide additional relief because India imports a substantial portion of its crude oil requirements. A sustained decline in crude prices can reduce India’s import bill and lower demand for dollars, potentially supporting the rupee.
What to Watch Ahead
The RBI’s upcoming ₹6 trillion, 15-day VRRR auction on August 31 will be a key event for India’s money markets. Investors will closely monitor the amount of liquidity absorbed, the bidding pattern and the resulting impact on short-term interest rates.
At the same time, the trajectory of US interest rates, global bond yields, crude oil prices, foreign investment flows and RBI intervention will remain important factors for the rupee and Indian government securities.
For the bond market, the immediate focus remains on whether the benchmark 10-year yield moves towards the 6.95% level. For the currency market, continued RBI dollar sales and foreign-currency inflows could help limit volatility, although month-end dollar demand and global risk sentiment remain potential sources of pressure.
Overall, the RBI’s record-sized VRRR auction signals a clear focus on absorbing excess liquidity while maintaining control over short-term money-market conditions. At the same time, the central bank’s foreign-exchange intervention is helping the rupee remain relatively stable despite persistent external pressures.
