October rate hike chance rises as RBI plans 30-day liquidity mop-up auction | Finance News

The chances of an interest rate hike — the first of this cycle — in the next monetary policy review scheduled for October 5-7 have increased, with the Reserve Bank of India announcing a 30-day variable rate reverse repo (VRRR) auction for a notified amount of Rs 7 trillion on Monday, the reversal of which coincides with the policy review date.

Liquidity surplus in the banking system hit a new record of Rs 10.3 trillion on Thursday, surpassing the previous record of Rs 9.7 trillion on Wednesday.

The central bank sweetened Monday’s VRRR auction by allowing banks premature reversal of the funds — a first for such an auction — that lenders had parked.

“Request for premature reversal can be placed at least two working days prior to the original date of reversal,” RBI said while announcing the auction.

The move is expected to bring relief to the bond market that had been bracing for further liquidity-tightening measures, dealers said.

“This means no more measures until policy. The rupee has remained under pressure, bond yields have stayed elevated, and liquidity in the banking system is skewed, with this, a rate hike now seems like the most preferable tool for the RBI,” said the treasury head at a private bank.

Market participants said that the partial reversal option could support demand for the 30-day VRRR, as banks were reluctant to lock in funds for longer given the tax outflows scheduled later during the month.

“With the option to seek premature reversal if liquidity is needed, banks may be more comfortable parking funds for the full tenor, supporting demand,” said a dealer at a primary dealership.

“With an option for partial reversal, it is likely to provide relief to the market as it indicates there may be no further liquidity measures before the October Monetary Policy Committee meeting,” said another dealer at a state-owned bank. “The yield (on the benchmark 10-year government bond) may open 2-3 basis points lower,” the person added.

The rise in liquidity in the banking system is mainly due to the concessional swap window for FCNR(B) deposits, through which banks raised $127.2 billion. The window closed on 31 August .

This has also resulted in a surge in the country’s foreign exchange reserves, which hit $740.8 billion for the week ended August 28 — a new record, surpassing the previous high of $729.3 billion reported a week earlier.

The reserves have risen by $73.9 billion during the current nine-week streak, the highest addition during such a streak since April-June 2021.

The current streak of nine weeks is also close to the longest on record in recent years. In April-June 2021, reserves rose for 10 consecutive weeks, adding $31.2 billion.

Foreign currency assets (FCAs), the largest component of the reserves, increased by $9.34 billion to $600 billion during the reported week. FCAs, expressed in dollar terms, include the effect of appreciation or depreciation of non-US currencies such as the euro, pound and yen held in the reserves.

Experts said that inflow data show that FCAs could rise further as additional foreign currency inflows are expected until the second week of September, with the inflows potentially taking FCAs to around $640 billion-$650 billion. While the FCNR(B) deposit mobilisation has ended, banks can avail of the swap facility for deposits already contracted with the central bank until September 11, which will reflect in the forex kitty in the coming weeks.

“Foreign currency assets should go up from here as inflow will come in by September 11,” said Madan Sabnavis, chief economist at Bank of Baroda. “We should be getting at least total of $100 billion-$110 billion, taking the total to around $640 billion-$650 billion FCAs,” he added.

The window for FCNR(B) deposits closed on August 31, 2026, while ECBs and OFCBs remain eligible under the facility until December 31, 2026.