Market sees OMOs worth Rs 60,000 crore in FY15

But only when liquidity deficit becomes structural

Amid rising yields on government papers, the Reserve Bank of India (RBI) is expected to infuse Rs 60,000 crore through open market operations (OMOs) in case of a structural liquidity deficit, analysts and experts said.

So far this financial year, the central bank hasn’t infused liquidity through OMOs, despite the yield on the 10-year benchmark government bond breaching the nine per cent mark in the first week of April, as liquidity was seen comfortable due to government spending.

“RBI will have to conduct OMOs of Rs 60,000 crore to fund loan demand of 17.1 per cent, even if it buys $33.9 billion of foreign exchange, (including maturity of forex swaps with oil companies) consistent with our balance-of-payments estimates,” Indranil Sen Gupta, India economist, Bank of America Merrill Lynch, said in a note to clients.

In a report released in January, the Urjit Patel committee had recommended OMOs shouldn’t be used to manage yields on government securities.

According to Street estimates, Rs 75,000-1,00,000 crore of government spending has been recorded since advance tax collections. Due to value-buying, the yield on the 10-year bond, which rose to 9.1 per cent earlier this month, has fallen.

Owing to comfortable liquidity, the Street doesn’t foresee OMOs in the near term. “At this juncture, I am not envisaging OMOs. In the past, RBI had said it would use OMOs as a liquidity-management tool. If the political outcome is favourable and if the rupee appreciates against the dollar, there will be plenty of liquidity. In the near future, it is very unlikely RBI will announce OMOs. There are possibilities of reverse OMOs if there is surplus liquidity in the system,” said Lakshmi Iyer, head of fixed income and product, at Kotak Mahindra Mutual Fund.

Earlier, RBI Governor Raghuram Rajan had said liquidity infusion through OMOs would take place as and when necessary.

Quoting Rajan, a Bank of America Merill Lynch report said, “There are three ways of adjusting the balance sheet — one, we can provide short-term liquidity; my sense is we provide short-term liquidity for short-term needs. Also, there is longer-term liquidity for longer-term credit growth and that can be effectively provided by increasing the size of our net domestic assets, open market operations and our net foreign assets…Some combination will happen over time. I cannot tell you the precise combination, but I envisage some combination will naturally happen.”

In the recent past, RBI bought dollars when the rupee appreciated due to dollar flows into domestic markets. This move, too, supported liquidity.

On Monday, the yield on the 10-year bond ended at 8.86 per cent, compared with the previous close of 8.85 per cent.