Related Insights
- CNY rates: Exports and liquidity supported CGBs09 Sep 2026
- USD Rates: Hinging on CPI09 Sep 2026
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Macro: Markets attention is squarely on the liquidity after-effects of strong inflows under the swap windows. The banking system surplus jumped past INR 10trn this week surpassing 2022 and Covid highs, with the durable balance widening sharply higher to INR 14trn, suppressing overnight call rates. This compares to average INR 1trn surplus in late-June. We discussed the various seasonal, near-term and permanent measures that the central bank might consider (see FCNR bonanza necessitates deft management) to absorb this surfeit. As a first line of defence, the RBI persisted with longer-duration VRRR operations, announcing an INR 7trn auction for 30-days, which attracted INR 2.6trn worth bids. Another overnight operation of INR 5trn absorbed INR 3.5trn. With the weighted average call rate still below benchmark level, more action is likely in the offing. Seasonal tax outflows and currency leakage will kick in the second half of Sep, mopping up the buffer at the margin, besides ongoing intermittent FX sales. Policymakers are being mindful of both the liquidity and signalling effects of the sterilisation tools at their disposal. Expectations are that further action by way of iCRR (incremental CRR), MSS or a combination might be considered, to align with a higher rate environment as inflation inches up.
After the initial bout of rupee outperformance on account of intervention and inflows, the USDINR settled into a range around the mid-94 handle this week. With oil prices creeping higher and the dollar benefiting from US rate hike expectations, pullback attempts in the USDINR are expected to be shallow. Recent inflows have nonetheless given the authorities additional firepower, which has helped to lower the tail risk of a sharp one-sided depreciation in the currency in the near-term. August inflation, due next week, could quicken to 4.8-4.9% from 4.4% month before, on a broader rise in food, apart from a pick-up in precious metals, pushing up core as well. On the rates front, the long end is anchored by the elevated global yields, with 10Y seen within 6.90-7.05%.
Rates: Indian rates continue to face upward pressure as the RBI has little incentive to push back against the recent hawkish repricing at a time when system liquidity remains exceptionally abundant. The immediate challenge is that surplus liquidity has become more difficult to absorb. The weak take-up at yesterday's 30-day VRRR suggests market participants are resistant to lock up funds ahead of a potentially higher policy rate, implying that longer-tenor VRRRs may remain less effective until the October meeting should current rate hike expectations remain. If the RBI seeks to drain liquidity before then, measures will likely exert further upward pressure on bond yields. The unsuccessful buyback on 3 Sep suggests the RBI does not see a need to lean against the recent selloff for now, reinforcing that support for G-Secs at current yield levels could be limited in the near term. For now, the path of least resistance for G-Sec yields remains higher.
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Related Insights
- CNY rates: Exports and liquidity supported CGBs09 Sep 2026
- USD Rates: Hinging on CPI09 Sep 2026
- JPY Rates: Carry & repatriation align 08 Sep 2026
Related Insights
- CNY rates: Exports and liquidity supported CGBs09 Sep 2026
- USD Rates: Hinging on CPI09 Sep 2026
- JPY Rates: Carry & repatriation align 08 Sep 2026