Strong FCNR(B) flows drive excess liquidity to 4-year high of ₹6.65 trn

Muted response to fresh ₹10 trn VRRR auctions; rupee appreciates to two-month high

Surplus liquidity in the banking system has surged to ₹6.65 trillion, the highest since April 19, 2022, the latest central bank data showed. Strong inflows mobilised through the Reserve Bank of India’s (RBI’s) foreign currency non-resident (bank) -- or FCNR(B) -- swap scheme have driven the sharp rise in liquidity.

 

Consequently, the RBI on Tuesday to conduct two variable rate reverse repo (VRRR) auctions totaling ₹10 trillion. Banks parked just ₹3.74 trillion with the central bank, well below the notified amount. 

 

Banks placed ₹1.14 trillion at the seven-day VRRR auction against ₹6 trillion offered, while ₹2.59 trillion was parked at the overnight auction against ₹4 trillion notified. Both auctions cleared at a cut-off and weighted average rate of 5.24 per cent.

  

On Monday too, banks had parked just ₹3.84 trillion during VRRR auctions, less than half the ₹10 trillion notified amount.

 

The RBI plans to conduct another overnight VRRR auction on Wednesday for ₹5 trillion.

 

“The overnight rates are at around 5.20 per cent, and the RBI is offering 5.24 per cent at the auction. There is not much spread for the banks to park their fund for a long term with the RBI,” said the treasury head at a state-owned bank.

 

The weighted average call rate, the operating target of monetary policy, settled at 5.16 per cent, compared with 5.18 per cent in the previous session.

 

Demand at the VRRR auctions remained subdued partly because liquidity is unevenly distributed across the banking system, with surplus funds concentrated among a few banks. Some large lenders have seen strong mobilisation through the FCNR(B) scheme, while inflows have been weaker for most mid-sized and smaller banks.

 

Banks had raised $65.4 billion through FCNR(B) deposits as of August 21, with the dollars subsequently swapped with the RBI, adding rupee liquidity to the banking system. System liquidity has since risen above ₹5 trillion, prompting the RBI to use VRRR operations to keep overnight rates aligned with its policy target and prevent excess funds from pushing short-term rates lower.

 

“We expect the total mobilisation to have touched $100 billion because the mobilisation was huge during the last fortnight,” the treasury head said.

 

 Meanwhile, the rupee strengthened to a two-month high, settling at 94.95 per dollar from 95.17 previously.

 

The currency extended gains for a third straight session, outperforming Asian peers as strong domestic growth data and dollar supplies from the RBI supported the rupee despite persistent geopolitical tensions. “The Indian rupee is on a winning streak, locking in its third straight day of gains and outperforming its Asian peers, thanks to stellar domestic growth numbers even as geopolitical tensions simmer and the central bank steps in with dollar supplies,” said Dilip Parmar, senior research analyst at HDFC Securities.

 

“On the technical front, spot rupee is facing tough resistance at 95.30 per dollar, while firm support has been seen around 94.50 per dollar. However, traders should buckle up for a bumpy ride ahead, as geopolitical news and surging crude oil prices are locked and loaded to trigger some serious volatility,” he added.