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The RBI announced a larger quantum of variable rate reverse repo (VRRR) auction on Thursday, dialling up the size of a seven-day auction to INR2.5trn, compared to three prior auctions at INR1trn each. Expectations were rife that another VRRR might be announced after onshore liquidity stayed well above INR 3trn this week, with the auction size likely to have provided cues on the exact intention of the absorption move. An increase in the auction size signaled that the authorities prefer the overnight rate to stay within the policy corridor, above the SDF rate and edge closer to the repo rate. With the upcoming seasonal tax outflows, system’s liquidity is likely to moderate towards the preferred level of 1% of the net demand and time liabilities (NDTL).
A weak June inflation reading, due on Monday, aligns with the policy committee’s decision to frontload rate cuts at the June review. June inflation is likely to slow to 2.1% yoy from 2.8% month before, marking the softest print in over six years and a fifth successive sub-4% reading. While perishables like vegetables and fruit costs have risen on sequential basis in line with seasonal trends, these segments likely moderated on year-on-year terms, partly due to a high base. A brief jump in oil prices due to geopolitical tensions was not sufficient to affect price readings. Headline inflation is likely to continue undershooting the core print, with the latter expected to stay around 4%, despite a correction in gold. Slowing inflation provides the room for the policy committee to consider further easing, though a cut in August is not on the cards. Market participants will seek clarity and guidance from the policy committee on the way forward, after bond yields hardened in wake of a combination of a bigger rate cut, stance change to neutral and absence of dovish talk at the June rate review.
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