The Reserve Bank of India's Monetary Policy Committee voted unanimously to maintain the policy repo rate at 5.25% for the fourth consecutive meeting on August 5th, as reported by NIPFP. The central bank conducted a significant ₹1.5 trillion VRRR auction on the same day to absorb excess liquidity from commercial banks. Following the auction, the weighted average call rate (WACR) rose to 5.18% from 5.05% in the previous session, with the standing deposit facility remaining at 5% and the marginal standing facility and bank rate at 5.5%. Governor Sanjay Malhotra's accompanying remarks highlighted that headline inflation has risen as expected, with core pressures remaining benign, while elevated crude prices linked to the continuing conflict in West Asia continue to cast a long shadow.
The latest central bank data reveals that banking-system liquidity was in a surplus of ₹3.61 trillion on Thursday, as reported by Business Standard. The weighted average call rate (WACR) has settled at 5.09% against the previous close of 5.18%, showing a slight improvement from the previous session's levels. Market participants noted that overnight tri-party repo (TREPS) rates had slipped below the Standing Deposit Facility (SDF) rate of 5%, prompting the central bank to absorb excess funds. A treasury official at a state-owned bank explained that the RBI wants overnight rates to remain around the repo rate rather than below the floor of the policy corridor.
The RBI has announced plans to conduct a seven-day variable rate reverse repo (VRRR) auction on Monday, aimed at absorbing ₹2 trillion from the banking system, according to Business Standard. This represents an increase from the previous ₹1.5 trillion auction conducted on August 5th. The VRRR auction serves as a liquidity absorption tool through which the RBI temporarily absorbs surplus funds from banks, preventing overnight money market rates from falling significantly below the policy corridor while retaining adequate liquidity in the banking system. As reported by NIPFP, Governor Malhotra indicated that the committee will wait for clearer evidence on both the path and the composition of inflation before any adjustment.
In its latest projections, the RBI revised its FY27 retail-inflation forecast downward from 5.1% to 5.0% while lifting the real-GDP growth forecast from 6.6% to 6.7%, according to NIPFP. Growth is described as resilient but expected to be lower than in the prior year, with the outlook remaining hazy due to uncertainties around global trade policy and the need for greater clarity on inflation's composition before any policy action. Food inflation continues to be the domestic flashpoint, with recurrent spikes in vegetables, pulses and other essentials keeping headline readings sticky even when core measures are contained. The fiscal and inflation channels are mutually reinforcing, as higher subsidy spending to cushion energy and fertiliser shocks adds to the deficit while the same shocks keep inflation elevated.
