Tame day in the markets, but the RBIs VRRR spooked the Rupee
As expected, the Reserve Bank of India left its main monetary policy settings unchanged, with the repo rate at 4.00%. still USD/INR eyes 74.00
RBI Governor Das said they would conduct VRRR - amount and tenor to be decided. This seems to have spooked the markets with USDINR spot and outright are gapping higher. Markets are worried about liquidity withdrawal, although Das said it should not be seen as liquidity tightening. Markets have been short into the MPC decision and spot broke 73.60 with risk of heading back to 74.00
What Is RBI's VRRR?
The Reserve Bank of India's Variable Rate Reverse Repo (VRRR) is not the same as China's Reserve Requirement Ratio. The VRRR, as with other central banks' reverse repo operations, is designed to set a floor under short-term rates, below which financial institutions would be unwilling to lend funds. According to the RBI, since 14-day VRRR auctions started on Jan. 15, surplus liquidity increased. The RBI announced Wednesday that it is conducting VRRR auctions of longer maturity. The amount and tenor will be based on evolving liquidity conditions.
Markets
Yesterday was a pretty quiet day in terms of newsflows. Still, the short term momentum appears to remain in favour of the bulls as investors seem happy and willing to bet on an economic rebound over the coming months in light of the robust data in recent week. And on top of all that, equity volatility continued to remain tepid around its lowest levels since the pandemic began encouraging risk-taking.
US equity indices remain resilient around recent record highs despite a late selloff that saw the close index down. But further out, the viewfinder is pointing to some significant consolidation in stocks as the street starts to factor in growth peaking over the next three months. A historically consistent view as the markets enter the window of peak US data (April, May, June).
And while the resilience of US equities in the face of elevated UST yields and proposals for higher US corporate taxes is mindboggling. Still, given the US infrastructure lengthy rollout time, it won't be long before market chatter starts gabbing about the 2022 fiscal drag.