Mata Securities India Pvt Ltd | SEBI Registered Research Analyst | Reg. No. INH000022668 | SEBI Registered MF Distributor | ARN-0158
August 2026 was a steepening month rather than a sell-off month — the front end rallied hard on an unplanned liquidity surge while the long end sold off on inflation and global rate cues. The focus now shifts to the August CPI print, the second-half borrowing calendar and the 7 October policy review. With the FCNR(B) swap window now closed, participants are favoring accrual and low-duration strategies, adding duration only on a clear policy or oil trigger.
The 10-year government bond yield rose 11 bps to 6.95% and the 5-year 13 bps to 6.58%, with the move concentrated in the final two weeks of the month.
Banking system liquidity surplus hit a record — the RBI absorbed ₹11,16,006.50 crore on 6 September — after the FCNR(B) swap window drew about $127 billion in deposits, nearly five times the $26 billion raised in 2013. August’s daily average surplus of ₹3.67 lakh crore was more than three times July’s ₹1.07 lakh crore, pulling the call rate down 19 bps to 5.18% and T-Repo 30 bps to 4.96%, below the SDF floor.
Short-end rates have kept falling into September, with the 3-month CD at 5.9% by 3 September, roughly 90 bps below where August began. VRRR take-up stays weak — a ₹6 lakh crore seven-day auction drew just ₹1.14 lakh crore — and the market now expects longer-tenor VRRR and OMO sales before any CRR hike.
The RBI has conducted 32 VRRR auctions since the start of August, with tenors from overnight to 14 days and cut-offs pinned at 5.24% throughout, but take-up has consistently fallen short — a ₹10 lakh crore combined offer on 31 August drew only ₹3.84 lakh crore, and a ₹6 lakh crore seven-day auction drew ₹1.14 lakh crore.
With the surplus at ₹10.32 lakh crore and the call rate down to 4.93%, below the SDF floor, the Bank escalated to a 30-day ₹7 lakh crore VRRR on 7 September carrying an early-exit option — a concession to banks reluctant to lock up cash, though ICICI Securities PD warns the redemption option costs the RBI control over the drain.
Debt fund returns split cleanly by duration — liquid, money market and ultra-short categories held firm while gilt and long duration funds posted negative one-month returns. Credit Risk funds led every window of six months and longer, and Debt Plus Arbitrage FoFs placed second over three years.
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