The Reserve Bank of India on Friday announced sale government securities worth Rs 1 lakh crore through open market operations amid a surge in liquidity following the mobilisation of FCNR(B) deposits.
It will be conducted in three tranches of Rs 50,000 crore, Rs 25,000 crore and Rs 25,000 crore on September 17, September 21 and September 28, 2026, respectively, the RBI said.
“More such auctions may follow, signalling that liquidity absorption will rely on OMOs and variable-rate reverse repos (VRRRs), rather than MSS or CRR measures. Raising the CRR would be counter-intuitive, given that FCNR(B) deposits were mobilised on the expectation of no CRR requirement. At VRRR auctions, banks are also facing negative carry, borrowing at an average 6.75% and investing in 5.24% VRRRs,” said Madan Sabnavis, chief economist, Bank of Baroda.
Liquidity Surge
Banking liquidity has strengthened sharply, driven by FCNR(B) deposit inflows. Banking-system liquidity stood at Rs 10.4 lakh crore as of Thursday. The surplus has averaged Rs 10.4 lakh crore over the past week compared to Rs 3.67 lakh crore in August and Rs 1.07 lakh crore in July, the RBI data showed.
Consequently, the weighted average call rate (WACR), the RBI’s operating target for monetary policy, has been trading well below the 5.25% repo rate. WACR ended at 5.02% on Friday.
Though the RBI conducted long-term VRRR auctions, participation remained muted as banks were reluctant to lock in funds for a longer period.
Market participants expect yields to rise as increased supply puts pressure on the market, while demand at the auction is also expected to remain weak.
“The market is likely to react negatively, as the Rs 1 lakh crore supply is substantial. Yields could rise by 3-4 basis points. The issue is unlikely to be fully subscribed. Today’s (Friday) auction was cancelled because yields were higher than expected,” said a treasury head at a private bank. The yield on 10-year benchmark bond ended at 7.02% on Friday, up six bps from the previous close.