Liquidity operations not for managing bond prices: RBI

Reserve Bank deputy governor Viral Acharya today said the central bank's liquidity operations is not driven to manage prices of government bonds.

The statement comes in the wake of recent surge in government bond yields.

"Except in rare, extraordinary economy-wide circumstances, the goal of RBI's liquidity operations is not to manage directly the prices of any particular long-term asset market," Acharya told reporters at the post-policy review conference today.

He said the fundamental factors which affect bond prices are domestic inflation, macro, global rates, commodity cycles; and the technical factor which impacts them is the relative supply of government securities in the market.
 

The system remains by and large still in surplus liquidity mode but is steadily moving towards the neutrality objective, he said.

The system liquidity was in deficit mode on few days in December and January, and RBI provided liquidity through its repo operations to manage the system's frictional liquidity needs on such days, he added.

"While the RBI remains ready to provide liquidity to meet such frictional needs, I would like to reiterate that RBI's liquidity operations are driven by it's monetary policy objectives and the need to meet economy's demand for reserves that also factor in the indirect liquidity injections through forex operations," Acharya said.

Last year the system witnessed unparallelled levels of surplus liquidity post demonetisation.

Reserve Bank's intervention to manage excess volatility induced by large capital inflows also added surplus liquidity to the system, he said.

To absorb this surplus liquidity and to reach the stated policy objective of neutral system liquidity, RBI has used multiple tools such as reverse repo, market stabilisation scheme (MSS) instruments and open market operations (OMO) sales, Acharya said.

RBI Governor Urjit Patel attributed the surge in the bond yields to hardening of yields abroad due to changes in the stance of systemic central banks such as the US Fed, increase in domestic inflation and also due to fiscal slippages seen in the recent times.