Banks parked simply ₹3.84 trillion through the Reserve Financial institution of India’s (RBI’s) variable fee reverse repo (VRRR) auctions on Monday, lower than half the ₹10 trillion notified quantity, regardless of surplus liquidity within the banking system rising above ₹5 trillion to its highest stage because the third week of April. They’d parked over ₹5 trillion every on Friday and Saturday on the RBI’s liquidity adjustment facility window.
Demand on the VRRR public sale remained subdued as liquidity within the banking system is erratically distributed, with surplus funds concentrated amongst a number of banks, sellers mentioned.
The central financial institution has been conducting VRRR auctions to soak up the excess liquidity that has constructed up within the banking system, with the current surge largely pushed by sturdy inflows via the international forex non-resident (financial institution), or FCNR(B), swap scheme. Banks had raised $65.4 billion via FCNR(B) deposits alone by August 21, with the {dollars} subsequently swapped with the RBI, including to rupee liquidity within the banking system. This swap window closed on Monday.
Whereas some massive banks noticed wholesome mobilisation, the identical was not true for many mid-sized and smaller banks, resulting in skewed liquidity throughout banks. This was additionally evident in in a single day charges, with the weighted common name fee closing at 5.18 per cent, near the coverage repo fee of 5.25 per cent.
Primarily on account of FCNR(B) flows, system liquidity has risen above ₹5 trillion, prompting the RBI to make use of VRRR auctions to maintain in a single day charges aligned with the weighted common name fee, its working goal, and stop extra funds from placing downward strain on short-term charges. The central financial institution plans to conduct one other ₹1 trillion VRRR public sale with a seven-day tenor on Tuesday.
Banks parked ₹1.34 trillion on the 15-day VRRR public sale on Monday towards the ₹6 trillion notified quantity, whereas they parked ₹2.50 trillion on the in a single day VRRR public sale towards the ₹4 trillion notified. Each auctions had been performed at a cutoff and weighted common fee of 5.24 per cent.
Market individuals mentioned banks had been reluctant to park funds for longer tenors comparable to 15 days and most popular in a single day devices, which gave them higher flexibility to evaluate their liquidity place day-to-day.
“Bankers aren’t comfy parking funds for that lengthy, say 15 days. They only needed to park it in a single day as a result of then they’ll take a call on a day-to-day foundation, relying on whether or not they have to take a position or whether or not there may be quite a lot of credit score outflow going down proper now,” mentioned a cash market seller at a state-owned financial institution.
Authorities bond yields hardened on Monday, monitoring the rise in crude oil costs, mentioned sellers. The market was additionally taking cues from geopolitical developments involving the US and Iran, together with hawkish feedback from Fed Chair Kevin Warsh on the Jackson Gap symposium, the place inflation administration was emphasised because the American central financial institution’s major goal.
The yield on the benchmark 10-year authorities bond settled at 6.95 per cent, its highest since June 8, 2026, in contrast with the earlier shut of 6.91 per cent.
“Crude oil has moved above $90 a barrel; the hawkish feedback from the Fed are additionally pushing yields larger. With the RBI additionally indicating a fee hike, all these elements are combining to push yields larger,” mentioned a gilts seller at a state-owned financial institution.
Market individuals mentioned yields are unlikely to see a right away correction and would stay elevated except the RBI intervenes within the fixed-income market.
Demand for presidency securities may enhance as soon as yields attain extra enticing ranges, presumably round 7.2-7.4 per cent within the 10-year section, mentioned sellers. At such ranges, banks may begin shifting funds from their books to the federal government securities market, mentioned market individuals.
Then again, the rupee strengthened to shut at 95.17 per greenback from 95.39 per greenback, regardless of an preliminary decline following a surge within the greenback index. The restoration was supported by seemingly intervention from the RBI via greenback gross sales and elevated greenback flows linked to MSCI rebalancing and FCNR(B) schemes.
