)
The Reserve Bank of India (RBI) after market hours on Tuesday announced Open Market Operations (OMO) purchase of government bonds up to Rs 10,000 crore. But the step may not help to ease the liquidity situation significantly.
The RBI decided to conduct this OMO despite no more government bonds auction in the offing for the current fiscal. The last government bond auction was held on February 15 worth Rs 12,000 crore. This is the second OMO which RBI decided to conduct this fiscal despite no auctions during the week. The previous OMO up to Rs 10,000 crore was held on March 1.
In the mid-quarter monetary policy statement on Tuesday RBI said that it will continue to actively manage liquidity through various instruments, including OMOs so as to ensure adequate flow of credit to productive sectors of the economy.
According to the street the impact of OMO will be marginal. “The borrowing by banks continue to be over Rs 1 lakh crore because banks are using their excess Statutory Liquidity Ratio (SLR) to borrow from RBI's Liquidity Adjustment Facility (LAF) and lend that money to meet their fiscal end targets,” said NS Venkatesh, chief general manager and head of treasury, IDBI Bank.
This is particularly the case because deposit growth in the banking system has been slow in the current fiscal.
The Finance Minister P Chidambaram on Monday had said that RBI would address the concerns pertaining to liquidity in its mid-quarter review of the monetary policy on Tuesday. “I am sure he (RBI Governor D Subarao) will address the issue of liquidity and there will be a paragraph on liquidity in the policy,” said Chidambaram.
Banks borrowed Rs 1,20,320 crore from RBI's Liquidity Adjustment Facility (LAF) window compared with a daily average borrowing of over Rs 1,00,000 crore in the last one month. Monday banks had borrowed Rs 1,42,670 crore from LAF window.
According to J Moses Harding, head—ALCO and economic and market research, IndusInd Bank the better solution to address the liquidity concern is government spending flowing back into the system. But in a scenario where the government wants to maintain the fiscal deficit target at 5.2% of Gross Domestic Product (GDP) for the current fiscal, it is very difficult to estimate the quantum and timing of government spending.
Harding expects the daily average LAF borrowing for the current fortnight to be Rs 1,20,000 crore. The reporting fortnight ends this Friday. According to him the liquidity situation will improve from the start of the next fiscal.
However, the OMO announcement is expected to boost bond market sentiments. The yield on the 10-year benchmark government bond 8.15% 2022 which ended at 7.90% compared with previous close of 7.88% is expected to fall to 7.87% on Wednesday, expects the street.
