RBI's OMO auction sees strong demand, but experts say job still half done

Net liquidity fell into deficit after seven weeks; net liquidity in the banking system was in a deficit of ₹68,586 crore on Wednesday

The Reserve Bank of India (RBI) on Thursday received bids worth ₹1.39 trillion at the open market operations (OMO) purchase auction, against the notified amount of ₹50,000 crore.

 

Market participants said that the cut-off yield was set along the expected lines.

 

The central bank has infused ₹1.45 trillion durable liquidity so far in December through OMO purchases and forex buy-sell swaps.

 

However, experts said that additional OMOs purchases might be needed to support smoother monetary transmission, help correct the excessively steep yield curve, and ease demand-supply pressures in the government bond market.

 

Meanwhile, the net liquidity in the banking system was in a deficit of ₹68,586 crore on Wednesday, according to the latest data by the RBI. Net liquidity fell into deficit mode after seven weeks.

 

The central bank on Thursday bought government securities across maturities, with the largest purchase in the 6.54 per cent GS 2032 at ₹17,519 crore, followed by the 7.18 per cent GS 2033 at ₹11,801 crore and the 6.33 per cent GS 2035 at ₹9,494 crore.

 

“The demand was better than the previous OMO auction, it was along the expected lines,” said a dealer at a state-owned bank.

 

Experts said that RBI purchases through the secondary market can draw in a wider set of participants and spread the liquidity benefit more evenly, unlike auction-based OMOs, which tend to be concentrated among banks.

 

“While the RBI has already pipelined the infused ₹1.5 trillion in December, we think that with a balance of payment (BoP) deficit tracking $25 billion this fiscal year, the RBI’s job is still half done. More infusion via OMOs would not only ensure smoother and better monetary transmission but also help alleviate the current excessively steep and unhealthy yield curve. Also, it would act as a balancing factor in the demand-supply mismatch in a sovereign market,” said a report by Emkay Global.

 

“Screen-based G-Sec buying by the RBI, while less explicit than auction-based OMOs, encourages broader market participation and could lighten the load across market players. In contrast, auction-based OMOs tend to be more bank-centric,” the report added.

 

Additionally, market participants said that conducting OMO purchases in more liquid securities would improve participation and price discovery.

 

OMOs in illiquid bonds often clear at 2 basis points-5 basis points above market levels, as banks seek to lock in gains, which reduce the overall effectiveness of such operations.

 

“Most of the papers were illiquid, which had led to some concerns before the first OMO auction around tendering of the papers,” said a dealer at a primary dealership.

 

“The market was somewhere not happy with the papers as they were not in the money in these securities,” he added.