Will use OMOs to tackle cash shortfall: RBI

The Reserve Bank of India will likely conduct more debt buybacks through open market operations (OMO) to meet cash shortages in between monetary policy reviews, Deputy Governor Subir Gokarn said.

"At this point, OMO is still an approach that we are following in response to assessment of liquidity tightness," Gokarn told reporters on Tuesday.

"(In) between policy announcements, clearly, this is something that we can continue to use as and when the need arises," Gokarn said.

Bond yields fell after Gokarn's comments, with the benchmark 10-year bond yield falling 5 basis points to 8.24%, as expectations of more buybacks strengthened.

 

The RBI announced a cut in CRR, or the proportion of deposits banks set aside with the RBI in cash, by 50 basis points to 5.5% at its monetary policy review on Jan 24.

The RBI has not conducted any buybacks since the CRR cut.

Gokarn said that pressures were persisting on liquidity and further cuts in cash reserve ratio was an option.

"That decision will be taken when we do our mid-quarter review, especially after having done one, the possibility of another is always on the table," he said.

The CRR cut, which came into effect on Saturday, released about Rs 32,000 crore of liquidity into a cash-strapped system.

In the policy review, the RBI kept interest rates unchanged citing higher core inflation.

Annual headline inflation, measured by the wholesale price index, slowed to a two-year low of 7.47% in December, thanks to a sharp decline in food inflation.

"We are looking at an inflation trajectory going into the next year, and the point we made is that the fiscal position that emerges in the budget for next year is going to have an impact on that trajectory," Gokarn said.

"The (fiscal deficit) number that comes out for 2011-12, whatever that number may be, is really something that has had an influence on the inflation trajectory over the previous year. So the number for FY13 is going to be an important factor," he said.

Gokarn said the RBI would resort to measures taken in November and December, if needed, to alleviate any pressure on the rupee.

So far in January, the rupee has gained 7.3% aided by renewed global risk appetite and dollar inflows into local debt.

The local currency fell about 16% in 2011.

"If there is further pressure on the rupee, obviously the measures that we took in November and December are still on the table in terms of addressing any speculative pressures."

The rupee was stronger at 49.33/35 to the dollar on Tuesday, compared with 49.79/80 at previous close.

"The rupee is now in a range that is something consistent with our approach," Gokarn said.