RBI announces open market bond purchase, second in a month

MUMBAI (Reuters) - The Reserve Bank of India (RBI) surprisingly announced to buy 100 billion rupees ($1.48 billion) of government bonds, its second in a month, to ease a rising cash crunch in the banking system.

However, the choice of bonds raised question among traders and analysts whether the central bank was trying to bring down long-term yield and not just infusing liquidity.

"The kind of on-the-run, liquid papers they have chosen shows that this is nothing but yield management," said a fixed income analyst at a primary dealership.

The RBI said it would buy 7.28 percent 2019, 8.83 percent 2023, 7.72 percent 2025 and 7.88 percent 2030 bonds on Tuesday.

On Monday, 2025 and 2030 were the most traded bonds.

The 10-year benchmark bond yield has risen 6 basis points to 7.81 percent so far this month on tight cash condition, large supply and China related uncertainties.

RBI's open market purchase of bonds in December also raised similar doubts ahead of the U.S. Federal reserve's widely expected rate hike decision.

Banking system liquidity deficit was nearly 1.4 trillion rupees as the government has built up a cash balance of nearly 1 trillion rupees after cutting spending to contain its fiscal deficit.

($1 = 67.7037 Indian rupees)

(Reporting by Suvashree Dey Choudhury; Editing by Anand Basu)