The Reserve Bank of India (RBI) on Monday said it might infuse up to Rs 12,000 crore this week via Open Market Operations (OMO), to ease liquidity pressure and create appetite for fresh supply of government bonds.
The central bank will purchase four lots of government securities using the multiple price method on Friday. This will be the first OMO conducted by RBI in the current financial year (April 1 onwards).
“This is an unexpected move, as OMOs were not seen coming before the second quarter,” said a senior treasury official of a large public sector bank. The official added that liquidity had remained tight for longer than expected. RBI had, last financial year, infused Rs 1 lakh crore through OMO.
Despite inflows of Rs 37,000 crore in the form of redemptions last week, repo borrowings from RBI’s Liquidity Adjustment Facility rose to Rs 1.12 lakh crore on Monday, as banks covered reserve needs on the start of the new reporting fortnight.
On Friday, repo borrowings had dropped to Rs 51,000 crore after staying above Rs 1 lakh crore for most of the week.
Market participants said RBI might have taken the measure to offset the liquidity pressure created by its recent foreign exchange intervention. The move would also help create space for heavy weekly auctions of government bonds.
“Liquidity is getting absorbed by government bond auctions, which are not being devolved on primary dealers,” said the official quoted earlier. The cut off yields in recent auctions had been inching up, reflecting the reducing appetite for fresh supply.
The government has pegged Rs 5.69 lakh crore of gross market borrowing this financial year, as compared to Rs 5.1 lakh crore raised in 2011-12. This has increased the weekly burden on debt markets to Rs 16,000-18,000 crore this year from Rs 12,000-15,000 crore in 2011-12.
RBI also said on Monday it would auction Rs 15,000 crore of dated government bonds on Friday.
This includes the current 10-year benchmark government bond, carrying a coupon rate of 8.79 per cent. Yields on the 10-year benchmark rose to 8.7 per cent on Monday, on expectations that the government would introduce the new benchmark security.
Typically, a bond turns illiquid on reaching issuances of Rs 60,000 crore, though there is no such regulatory ceiling. Issuances under the current 10-year benchmark bond have increased to Rs 70,000 crore, according to RBI data.