Indian Central Bank Infuses Record Overnight Funds Post Heavy FX Intervention

The Reserve Bank of India (RBI) has announced a record overnight funds infusion of 2.50 trillion rupees ($28.85 billion) through an overnight variable rate repo auction on Wednesday, February 12, 2025. This move comes in the wake of aggressive foreign exchange (FX) intervention by the central bank in the last two sessions, as it sought to support the Indian Rupee (INR) amid global uncertainties.

The RBI's aggressive dollar sales, amounting to between $4 billion and $7 billion on Monday and continuing on Tuesday, helped to contain the Rupee's depreciation. According to Bloomberg data, the Indian Rupee depreciated by 4.02% since September, which was lower compared to other major currencies. The Rupee's depreciation was also less than that of the South Korean Won (-7.56%) and New Zealand Dollar (-8.82%).

The RBI's intervention led to a sharp recovery in the Rupee, with USD/INR retreating from nearly 88 to around 86.65 in the spot market. This intervention has helped to reduce the volatility of the Indian Rupee, making it one of the least volatile major currencies in the last few months.



The RBI's overnight funds infusion is aimed at addressing the liquidity deficit in the banking system, which quadrupled in less than a week to around 2 trillion rupees as on February 10, 2025. Traders cited tax outflows and aggressive dollar sales by the central bank as reasons for the jump in liquidity deficit.

The infusion of funds is expected to lead to a drop in overnight interbank and money market rates, as well as near-end overnight index swaps (OIS), according to traders. This is because the increased supply of money in the market will decrease the demand for short-term funds, leading to a decrease in interest rates.

The three-month treasury bill yield eased five basis points to 6.55%, while the three-year to five-year bond yields were down by six to seven bps at around 6.70% levels. The 10-year benchmark bond yield eased only by three bps to 6.78%. This indicates that the impact of the RBI's funds infusion is more pronounced in the short-term money market rates and less so in the longer-term bond yields.

The decision to switch to daily variable rate repo (VRR) auctions is also expected to bring short-term rates closer to the repo rate, according to A Prasanna, head of research at ICICI Securities Primary Dealership. However, temporary liquidity injection is not expected to have any significant impact on the longer-term yield curve, as the need for durable liquidity remains unfulfilled, said Alok Singh, group head of treasury, at CSB Bank.

In conclusion, the RBI's aggressive FX intervention and record overnight funds infusion are expected to have a significant impact on the Indian Rupee's exchange rate, volatility, and short-term interest rates. While the intervention has helped to contain the Rupee's depreciation and reduce volatility, there are also potential risks and challenges that need to be managed. The funds infusion is expected to lead to a drop in short-term interest rates and money market yields, with the impact on longer-term bond yields being limited.