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OMOs not to reduce govt's borrowing cost: Gokarn

RBI deputy governor says the apex bank will not use OMOs regardless of what the yields are

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Open market operations (OMOs) are not intended to reduce the cost of borrowing for the government but are monetary instruments to manage liquidity, Deputy Governor said today.

"The are not G-Sec buying sprees. They are motivated by only one factor that is (management of) liquidity deficit in the system.

"We do OMOs only when the LAF (liquid adjustment facility) borrowing is more than our comfort zone. It is not a yield management strategy or an attempt to reduce the borrowing cost for the government," Gokarn told reporters at the customary post-policy interaction.

Gokarn, who oversees the monetary policy at RBI, also said if the liquidity is comfortable, then the apex bank will not use OMOs regardless of what the yields are.

Liquidity conditions have eased since the April policy due to consistent OMOs conducted by the central bank.

The RBI had infused around Rs 86,000 crore into the system through OMOs in the first quarter in its bid to manage liquidity. This enabled the daily average borrowing through LAF to come down to around Rs 47,000 crore in July from around Rs 1.5 lakh crore in the January-March period.

Gokarn also pointed out that today's decision to reduce SLR (statutory liquidity ratio) will also help in managing liquidity better.

Explaining the rationale behind the status quo in policy rates, he said risks to inflation have increased.

He said the bank had cut repo rate by 0.5% in the April policy due to lower inflation projection at that time, but things have changed since then.

"The rate cut in April was based on many other factors. We had the Budget announcement. We had the prospects of fiscal correction. We also had the projection of a normal monsoon. Based on these factors, inflation risk was perceived to be less than growth risks, so we took those steps. But, since then things have changed," he said.

Gokarn said, "three months later, we have assessed that risks to inflation has increased due to various factors".

Among other things, RBI's inflation forecast for the fiscal ending March, 2013 has been raised to 7% from earlier projection of 6.5%.

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