RBI mops up Rs 11.6K crore via OMOs in July amid liquidity surplus

The Reserve Bank of India (RBI) did outright open market operation (OMO) sales of government securities worth Rs 11,675 crore in July in order to drain out excess liquidity from the banking system, according to the latest data by the RBI.

The OMO was screen based, and so, no formal auction was conducted in order to sell the government securities.

OMO refers to the purchase or sale of government securities in the open market by the central bank. The RBI had not conducted any OMO in June.

The banking system liquidity remained largely in surplus mode during July.

The liquidity surplus neared Rs 3 trillion in the first week of August, before moderating to a surplus of Rs 1.78 trillion on Thursday, latest data by the RBI showed. The liquidity improved following resumption in spending by the Centre and states post-Budget. 

Sucking out excess liquidity would mean overnight rates do not fall as the central bank is maintaining a tight monetary policy. This comes as headline inflation is ruling above the target, mainly due to the elevated food prices.

A report by SBICAPS said, “We believe the RBI will continue to manage liquidity cautiously, as indicated by its multi-year high variable rate reverse repo (VRRR) auctions in tandem with net OMO sales. At the same time, it recognises the increased need for higher quality banking system liquidity, epitomised by its recent draft proposal on strengthening the liquidity coverage ratio (LCR) framework, in times of digital banking.”

Along with OMO sales, the RBI has also been conducting VRRR auctions in order to drain excess liquidity.

Banks parked Rs 14,954 crore, against a notified amount of Rs 1 trillion at the 14-day VRRR auction on Friday.

During the three-day VRRR auction, banks parked Rs 45,236 crore against a notified amount of Rs 75,000 crore.

Market participants expect the RBI to continue conducting OMO sales in small amounts.

“The food inflation is at a higher end and it's going to be very high for a reasonable period of time. So, it is possible that they may suck out liquidity. Until they reach a comfortable level of liquidity, they may conduct OMO sales in small amounts,” said Vinay Pai, head of fixed income at Equirus Capital.

The Monetary Policy Committee (MPC) revised the inflation forecast on a quarterly basis in Q2 at 4.4 per cent, Q3 at 4.7 per cent, and Q4 at 4.3 per cent. These are against the previous projections of Q2 at 3.8 per cent, Q3 at 4.6 per cent, and Q4 at 4.5 per cent.

Inflation for the first quarter of the next financial year was projected at 4.4 per cent.

The domestic rate-setting panel projected the inflation at 4.5 per cent for FY25 in the August meeting held last week. This is the same as the previous projection made in the June meeting.