RBI to conduct ₹6 trillion VRRR auction to soak up excess liquidity

Benchmark 10-year government bond yield settles at 6.91 per cent, while the rupee closes at 95.39 per dollar as RBI dollar sales support the local currency

The Reserve Bank of India (RBI) will conduct a 15-day variable rate reverse repo (VRRR) auction worth ₹6 trillion on August 31, the highest quantum for such an auction so far, as it looks to absorb surplus liquidity from the banking system. 

 

Surplus liquidity, measured by banks parking their excess funds in the liquidity adjustment facility window, was ₹3.75 trillion on Thursday.

 

The move is seen as a relatively less painful way of managing liquidity compared to asking banks to maintain a higher proportion of deposits as cash reserve ratio, with the timing coinciding with the expected outflow of funds towards advance tax payments.

 

 

“The measure is not as disruptive as the incremental cash reserve ratio (ICRR) route,” said a bond trader. CRR is the portion of cash banks need to park with the central bank for which they do not earn any interest.

 

Following hawkish minutes of the monetary policy committee’s (MPC’s) August meeting, a section of market participants expects the central bank to start hiking interest rates as early as October, and to drain surplus liquidity before the rate hike to make monetary transmission more effective.

 

On Friday, the RBI’s three-day VRRR auction received bids worth ₹1.52 trillion against the notified amount of ₹3 trillion at a cut-off rate of 5.24 per cent.

 

The weighted average call rate (WACR) – which is the operating target of the monetary policy – settled at 5.22 per cent against the previous close of 5.21 per cent.  

 

Government bond yields rose on Friday as traders offloaded bonds amid caution ahead of US Federal Reserve Chair Kevin Warsh’s Jackson Hole speech later in the day, said dealers.

 

The yield on the benchmark 10-year government bond settled at 6.91 per cent, the highest since June 11, against the previous close of 6.89 per cent.

 

“There was caution in the market ahead of the US Fed Chair speech, which will give signals on US rate trajectory,” said a dealer at a primary dealership. “The yield – on the benchmark 10-year government bond – is seen heading toward 6.95 per cent from here,” the person added.

 

During the week, the yield on the benchmark 10-year government bond hardened by 6 basis points (bps), while that on the 5-year government bond inched up by 5 bps.

 

On the other hand, the rupee was supported by the Reserve Bank of India’s (RBI’s) intervention via dollar sales and the fall in crude oil prices during the day, said dealers.

 

Market participants said the central bank supplied dollar to the market during the week, which kept the rupee afloat amid month-end dollar demand among importers.

 

The local currency settled at 95.39 per dollar, against the previous close of 95.55 per dollar. It was up by 0.34 per cent against the dollar for the week.

 

“The pressure was from month-end dollar demand, but the RBI kept supplying dollar to the market,” said a dealer at a state-owned bank. “The dollar flow, which is coming on the back of schemes, the RBI is using it to contain volatility,” the person added.

 

The RBI on Thursday allowed banks to access its concessional dollar-rupee swap facility for Foreign Currency Non-Resident (Bank), or FCNR(B), deposits outside their designated weekly window for transactions exceeding $100 million. The swap facility has attracted total inflows of $72.85 billion as of August 21, according to the latest data released by the central bank. The rupee has depreciated 4.62 per cent against the dollar since the start of the West Asia war in late February. However, it has remained stable in August so far.