RBI Seen Managing Frictional Liquidity via VRR, VRRR: I-Sec PD

The Reserve Bank of India may have already infused sufficient durable liquidity into the banking system and is now likely to focus on managing frictional liquidity through variable rate operations over the remainder of the financial year, according to a note by ICICI Securities Primary Dealership Limited.

With rate cuts ruled out and policy settings expected to remain unchanged for several meetings, the central bank’s attention is likely to shift towards ensuring effective transmission of earlier easing. Since December 2025, the RBI has injected durable liquidity of around ₹3.5 trillion through open market operations and foreign exchange swaps amounting to $25 billion, significantly improving core liquidity conditions. Core liquidity, excluding 90-day variable rate repos, is estimated at about ₹4.5 trillion, a level seen as sufficient to maintain a system surplus through the end of March after accounting for currency leakage and cash reserve ratio drains.

The outlook for durable liquidity has also improved as the RBI’s forward book has shifted towards longer-tenor contracts, limiting near-term maturity pressures. Improved sentiment around the India-US trade framework is expected to stabilise the dollar rupee and encourage two-way flows, reducing hedging demand, the note said.

Against this backdrop, the ICICI Securities Primary Dealership does not expect further durable liquidity OMOs in the current quarter, although secondary market purchases could be deployed if bond market conditions deteriorate.

The RBI is likely to rely on variable rate repos to manage frictional liquidity, particularly around quarter-end. The introduction of prepayment flexibility in 90-day VRRs has ensured strong participation, allowing banks to borrow without concerns over unexpected liquidity inflows.

VRR with VRRR
Additional March-end crossing VRRs may be required if government cash balances surprise on the upside, driven by stronger-than-budgeted small savings collections. At the same time, intermittent variable rate reverse repos may be necessary to anchor overnight rates closer to the policy rate and prevent perceptions of stealth easing if rates persist below the standing deposit facility, the research note said.

Looking ahead to 2026-27, the RBI may need to inject about ₹3.5 trillion of durable liquidity, largely through OMOs, with the requirement rising to around ₹4.5 trillion once maturing holdings are factored in. While OMOs are typically back-loaded, the governor’s emphasis on pre-emptive liquidity management leaves open the possibility of early operations, including in April, when currency leakage linked to the harvest season tends to rise.

The report expects the benchmark 10-year government bond yield to trade in a 6.7%–7% range in the near term, as the curve remains steep amid heavy issuance expectations and limited offset from government cash deployment.