RBI's liquidity test may set future course
· Business · Economic Times
The Reserve Bank of India is managing a significant liquidity challenge following a surge in FCNR(B) scheme inflows. To navigate this, a pivotal 30-day variable reverse repo (VRRR) auction to absorb ₹7 lakh crore will determine the central bank's management strategy. Market participants suggest the central bank may deploy additional tools like sell-buy dollar swaps and bond sales through open market operations to sterilise the injection. Strong participation in the upcoming VRRR auction would indicate that efforts to maintain neutral liquidity are succeeding. Emkay Global economist Madhavi Arora noted that the way path is to allow $36 billion forward dollar positions to mature within a year to absorb rupee liquidity.
Why it matters
The outcome of the VRRR auction determines whether the way can successfully absorb excess liquidity without pushing bond yields higher for government borrowing.
Read the original report — Economic Times
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