RBI to infuse ₹1.25 trillion; $10 billion dollar-rupee buy-sell swap

The Reserve Bank of India (RBI) on Friday announced a set of liquidity measures through open market operations (OMOs), dollar-rupee buy-sell swaps, and long-term variable rate repo (VRR) operations, in a bid to infuse liquidity into the banking system. 

 

OMOs will involve the purchase of Government of India securities worth ₹1 trillion in two tranches of ₹50,000 crore each on February 5 and February 12.

 

A 90-day VRR auction for ₹25,000 crore will be conducted on January 30.

 

Additionally, a dollar-rupee buy-sell swap of $10 billion for three years will be held on February 4.

 

While announcing the liquidity measures, the central bank said the decision was taken after reviewing the current liquidity and financial conditions, adding that it would take measures to ensure orderly liquidity conditions.

 

 

“The Reserve Bank will continue to monitor evolving liquidity and market conditions and take measures as appropriate to ensure orderly liquidity conditions,” the central bank said.

 

Liquidity infusion comes when surplus liquidity in the system on Thursday fell to about ₹10,000 crore, the latest data shows. Liquidity conditions may become tight became loan demand typically becomes strong in the last quarter of a financial year.

 

Experts said the central bank by March-end might conduct OMOs of an additional ₹1 trillion to lift liquidity to around 0.9 per cent of net demand and time liabilities (NDTL), comfortably within the RBI governor’s indicated comfort range of roughly 0.6-1 per cent.

 

“We see space for one more OMO of ₹1 trillion. And the measures will ensure that by March liquidity goes to around 0.9 per cent of NDTL,” said Gaura Sen Gupta, chief economist, IDFC FIRST Bank.

 

Economists said while OMOs had been the primary source of liquidity infusion, buy-sell swaps had largely been used to elongate the maturity profile of the RBI’s forward book, pushing positions into the one-three-year tenor segment rather than expanding overall liquidity.

 

“Buy-sell swaps are primarily being deployed to lengthen the maturity of the forward book. For now, the forward book remains at a moderate level, with the bulk of the swap activity aimed at pushing maturities beyond one year rather than adding fresh liquidity,” Gupta said.

 

The latest forward-book data showed that net short-dollar positions in contracts of less than a year fell to $37.9 billion at the end of November against $39.3 billion at the end of September, while short positions in contracts of more than a year rose to $28 billion from $20 billion in the same period.

 

Participants in the bond market said OMO auctions would lead to softening in the yield on the benchmark 10-year government bond by 2-3 basis points.

 

“The OMO auction will ease some pressure while the market lacks any significant positive cue,” said a dealer at a state-owned bank.

 

The RBI, though, has maintained that OMO purchases are meant purely as a liquidity-management tool and not for influencing yields.