RBI's liquidity test may set future course
The Reserve Bank of India is currently grappling with a notable liquidity dilemma due to a surge in FCNR(B) scheme inflows. To navigate this, a pivotal variable rate reverse repo auction is set to influence the liquidity management strategy. The central bank may also utilize measures such as dollar swaps and bond sales.
The Reserve Bank of India's (RBI) liquidity test through the 30-day variable rate reverse repo (VRRR) auction could significantly influence future monetary management. The VRRR auction aims to absorb the considerable liquidity generated by the FCNR(B) scheme, which totals ₹10.5 lakh crore. Market participants anticipate additional tools such as sell-buy dollar swaps and open market operations (OMOs) may be necessary to manage the excessive liquidity.
Strong participation in the VRRR auction suggests the RBI's efforts to maintain a neutral liquidity level may have been successful. However, the RBI will need to use a combination of tools, including bond sales through OMOs and sell-buy dollar swaps, to absorb the excess rupee liquidity generated by the FCNR inflows. The RBI's liquidity management has been crucial due to the record $136 billion inflows, which is far beyond the initially expected $80-90 billion.
The central bank may opt to sell bonds with three to five-year maturities, matching the tenure of the liquidity generated through the FCNR scheme. Bankers suggest more VRRR auctions may be required to ensure the medium-term management of excess liquidity. The RBI has previously conducted a 90-day VRRR auction, which could happen again if needed.
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