RBI to hold OMO purchase of govt bonds on Tuesday

Move to comfort liquidity scenario and bond market sentiments

The Reserve Bank of India (RBI) on Friday announced the first open market operation (OMO) purchase of government bonds for the current financial year, which is expected to comfort the liquidity scenario, as well as result in government bond yields falling from the current levels. RBI will conduct OMO up to Rs 10,000 crore on Tuesday for four government securities namely 8.07 per cent 2017 (July), 7.35 per cent 2024, 8.20 per cent 2025 and 8.28 per cent 2032.

The yield on the 10-year benchmark government bond 8.15 per cent 2022 ended at 7.74 per cent on Friday compared with the previous close of 7.72 per cent. During intra-day trades the yield touched a high of 7.81 per cent.

“Yields rose during intra-day trades as RBI’s monetary policy guidance was hawkish. But the OMO announcement will help the market next week, and I expect the yield on the 10-year benchmark bond to fall below 7.70 per cent,” said Anoop Verma, vice-president, Development Credit Bank.

RBI said in its monetary policy statement the balance of risks stemming from the Reserve Bank’s assessment of the growth-inflation dynamic yields little space for further monetary easing. Banks borrowed Rs 78,610 crore from RBI’s Liquidity Adjustment Facility (LAF) on Friday, compared with a borrowing of Rs 1,101.45 crore on Thursday. The borrowed amount has been above RBI’s comfort zone of +/- 1 per cent of banks’ net demand and time liabilities. “After this OMO announcement next week, bank borrowings under LAF will come down to RBI’s comfort zone,” said SSrinivasaraghavan, executive vice-president and head-treasury of Dhanlaxmi Bank.

In the last financial year, RBI injected liquidity to the tune of Rs 1,54,600 crore by way of OMOs. In order to alleviate liquidity pressures, RBI also lowered the Cash Reserve Ratio of banks cumulatively by 75 basis points on three occasions and the statutory liquidity ratio by 100 basis points during the financial year.

However, despite that, liquidity remained under pressure due to persistently high government cash balances with RBI and elevated incremental credit to deposit ratio for much of the year.