RBI scoops up Rs 26,000-crore bonds anonymously in a single day

The Reserve Bank of India (RBI) bought about Rs 26,000 crore of bonds from the secondary market anonymously on February 12, a day after it bought Rs 20,000 crore as part of its announced open market operations (OMOs), showed the data released by the central bank on Friday.

This shows that contrary to what the bond market says, the RBI is pumping in enough liquidity in the system. The week had heavy borrowing pressure, as there were two auctions to be conducted. On February 11, the RBI sold Rs 26,000 crore of bonds in a special auction of five and 10-year bonds.

On February 12, the central bank raised Rs 32,125 crore through regular auction, including devolvements of Rs 6,700 crore on primary dealers.  The 10-year bond yields had shot up to 6.12 per cent on February 2 after the Budget, from 5.90 per cent close to the Budget Day. But the RBI’s two auctions ensured the yields closed at 5.95 per cent. However, the yields have climbed back again to 6.13 per cent as the RBI did not offer much of a secondary market support. 

This may also indicate that the bond market is forcing the RBI to bring more OMOs, failing which they are pushing up yields. “The bond market is pushing up yields to buy at lower prices, then demanding for OMO. There is definitely some amount of greed involved here,” said a rates expert requesting anonymity.

The central bank has been doing OMOs, both announced and unannounced throughout the year. Alongside outright OMOs, it conducted special OMOs to buy long-term bonds and sell an equivalent amount of short-term bonds. But outright OMOs have become the norm now. Net of sales, the central bank till February 14, has purchased Rs 3.04 trillion of bonds from the secondary market. Sources say the next fiscal year’s purchase could be even more in order to keep the 10-year yields below 6 per cent mark. 

Earlier, the RBI used to do anonymous bond purchases to fill up its bond holdings. But now, it is simply expanding its balance sheet to accommodate the huge government borrowing programme. The borrowing for the present fiscal year will cross Rs 14 trillion, while for the next, it is scheduled at Rs 12 trillion. Therefore, the RBI has to do more accommodations. 

The issue, though, is that the RBI is trying to keep the yields under 6 per cent, which the bond market participants don’t think is feasible.

“When the economic momentum is picking up pace, both inflation and interest rates rise. If the RBI has to contain yields, it will have to keep on feeding the market its liquidity needs, and that would imply doing more and more pre-announced OMOs,” said a senior bond trader.