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Overnight money market rates rose after the Reserve Bank of India’s (RBI’s) seven-day Variable Rate Reverse Repo (VRRR) auction on Friday.
The weighted average call rate (WACR), which is the operating target of the monetary policy, inched closer to the policy repo rate of 5.5 per cent as it settled at 5.38 per cent, against the previous close of 5.27 per cent. The weighted average overnight TREPS (Treasury Bills Repurchase) rate settled at 5.42 per cent, against 5.24 per cent on Thursday.
The VRRR auction was conducted to align the overnight rates closer to the repo rate. These rates were trading much below the policy repo rate due to significant surplus liquidity in the banking system.
The RBI received bids worth ₹84,975 crore at the VRRR auction, against the notified amount of ₹1 trillion. Money market participants said that the amount of bids was lower than expected.
“The bids were lower because of reporting Friday, which is today, and quarter-end. Also, it is a long-tenor VRRR, hence the bidding was lower," said a call dealer with a public sector bank (PSB). ALSO READ: India's current account swings to $13.5 bn surplus in March quarter: RBI
The central bank accepted the amount at a 5.49 per cent cutoff rate. The VRRR auction was conducted as the overnight rates remained well below the repo rate and could have declined further with the onset of government spending at the start of the month (July), said dealers.
The net liquidity in the banking system was in a surplus of ₹2.78 trillion on Thursday, according to the latest RBI data.
On the other hand, the coupon on the new three-year government bond was set at 5.91 per cent at the weekly auction, which was better than market expectation. However, the cutoff price on the 10-year was lower than expected, which led to a selloff in the secondary market, said dealers.
The yield on the benchmark 10-year government bond rose by 3 basis points (bps) after the auction results. The benchmark yield settled at 6.40 per cent, against the previous close of 6.37 per cent.
Market participants said that the 6.33 per cent 2035 government bond is poised to become India's new 10-year benchmark bond starting next week, replacing the 6.79 per cent 2034 bond. With the auction on Friday, the outstanding amount on the 2035 bond now stands at ₹90,000 crore.
“The three-year coupon was better than what we expected, but the cutoff price on 10-year was 7-8 paise lower, which is the reason we saw some selling after the results were out,” said a dealer at a primary dealership. “Now is the time for the 2035 bond (new 10-year bond) to become benchmark as the outstanding is now ₹90,000 crore; the liquidity should improve now, and it should take over as benchmark from next week,” he added.
Meanwhile, the rupee witnessed its highest weekly gains in more than two year, since January 13, 2023. The local currency appreciated by 1.3 per cent during the week on the back of a fall in dollar index, said dealers.
On Friday, the rupee appreciated by 0.3 per cent against the greenback, tracking the fall in crude oil prices and broad-based weakness in dollar to recover all its losses for the current financial year (FY26). The rupee settled at 85.49 per dollar, against the previous close of 85.71.
In the current calendar year (CY25), the domestic unit has depreciated by 0.15 per cent against the dollar so far.
“The broad-based dollar weakness, and fall in crude prices were the reasons behind the rupee’s appreciation,” said a dealer at a state-owned bank. “The RBI has been there in the market for the last two days,” he added.
The dollar index fell by 1.5 per cent during the week to 97.30. It measures the strength of the greenback against a basket of six major currencies. Brent crude oil prices fell by over 12 per cent over the week to $68.17 per barrel. The dollar index fell after US President Donald Trump suggested that Federal Reserve Chair Jerome Powell could soon be replaced, fuelling expectations of a rate cut as early as July. The remark sparked concerns over the future independence of the US Federal Reserve.
