The Reserve Bank of India (RBI) has stepped up efforts to drain excess liquidity as a surge in foreign-currency inflows swells cash in the financial system.
The RBI will conduct a 15-day variable rate reverse repo (VRRR) auction worth ₹6 lakh crore ($62.9 billion) on August 31, according to a statement on Friday. Over the past few weeks, banks have parked surplus funds with the RBI through VRRR auctions with tenors of up to seven days.
The central bank deploys the monetary policy tool to temporarily absorb excess liquidity from the banking system. The latest move marks a shift towards larger and longer-tenor operations as the RBI seeks to absorb liquidity generated by its measures to attract foreign inflows to shore up the rupee.
India garnered dollar inflows worth $72.8 billion as on August 21 under the RBI’s special swap windows, exceeding market expectations. The current surplus in the banking system stands at over ₹4 lakh crore, according to a Bloomberg Economics Index.
The VRRR auctions have absorbed nearly half the surplus so far, but additional measures may be required as liquidity peaks in September, Gaura Sen Gupta, chief economist at IDFC FIRST Bank, said in a note this week. “The liquidity management strategy will influence both money market rates and the yield curve.”
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