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Bond market participants expect that the Reserve Bank of India (RBI) will significantly scale up its Open Market Operation (OMO) purchases in the coming weeks as liquidity deficit in the system stayed around ₹2 trillion.
They said that the RBI could double the scheduled OMO purchase amount for the next auction as well, increasing it from the current ₹20,000 crore to ₹40,000 crore. This is expected to provide additional liquidity to the financial system, which has remained in the deficit mode for the past eight consecutive weeks since December 16, 2024.
Furthermore, the bond market expects that the RBI might announce additional OMO auctions. So far, the central bank has announced three OMO auctions.
On Wednesday, the net liquidity in the banking system was in a deficit of ₹2.07 trillion, latest RBI data showed. The core liquidity was in a deficit of ₹40,000 crore as of February 7.
“Next week's OMO amount might be increased from ₹20,000 crore to ₹40,000 crore. After that they might announce more. Because the amount which was infused through OMOs has been used in foreign exchange market intervention. We are still in a deficit of around ₹2 trillion,” said the treasury head at a private bank.
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RBI’s active intervention in the foreign exchange market to avoid sharp decline in rupee against the dollar has weighed on the banking system liquidity. Foreign exchange market dealers said that the central bank could have sold around $12 billion-$14 billion in the current week.
The rupee, however, remained steady on Thursday to settle at 86.92 per dollar, against 86.89 per dollar on Wednesday.
The RBI purchased ₹40,000 crore worth of securities in the OMO auction on Thursday. The central bank received bids worth ₹1.8 trillion, or 4.5 times, against the notified amount of ₹40,000 crore.
Market participants said that state-owned banks were the largest participants at the auction. The cut-off price on the bonds scheduled for auction was set below the secondary market price because of high demand, they said.
“Banks sold securities from their HTM (held-to-maturity) portfolio to book treasury profits. The cut-off price was lower than market level,” said a dealer at a primary dealership. “Now that they have sold from HTM, to fill the gap, there will be demand at the weekly auction tomorrow (Friday),” he added.
The benchmark 10-year government bond will have its last auction for the current financial year (FY25) on Friday. The government plans to sell ₹22,000 crore of 10-year bond on Friday.
Under the updated investment portfolio norm, banks must categorise bonds as “held-to-maturity” on a permanent basis, with the exception of 5 per cent of the portfolio that can be withdrawn throughout the year. Any deviation from this rule requires approval from both the bank's board and the RBI.
Earlier, banks were allowed to reclassify their investments between categories once a year on the first day of the financial year, through which they used to book capital gains.
The RBI has also been conducting daily variable rate repo (VRR) auctions, under which the central bank received bids worth ₹2.35 trillion, against the notified amount of ₹2.75 trillion.
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