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RBI to infuse Rs 50,000 crore in January, bonds likely to rally

MUMBAI: The Reserve Bank of India will purchase Rs 50,000 cr..

MUMBAI: The Reserve Bank of India will purchase Rs 50,000 crore of bonds in January and has earmarked an additional Rs 10,000 in open market operation (OMO) for December to intensify cash injection into the banking system starved of cash that is likely to trigger a rally in the government bond market Wednesday.

“The liquidity conditions will continue to be monitored and depending on the assessment, RBI will consider similar quantum of OMO purchases until end of March 2019,” RBI said in a release Tuesday. “The exact calibration of the quantum of OMO would depend on sustained changes in the behaviour of currency in circulation, the magnitude of sterilisation operations for RBIs forex operations and other relevant factors.”

Open Market Operation or OMO is a regulatory tool either to infuse liquidity or suck out excess cash from the banking system through buying or selling of sovereign bonds.

A few weeks ago, RBI announced Rs 40,000 crore of OMO purchases. The central bank has now increased it by Rs 10,000 crore through the two remaining scheduled OMO of Rs 15,000 crore each.

While the central bank decided to conduct Rs 50,000 crore OMO purchases in five tranches next month, the following two months may also see similar quantum of bond purchases.

“This large OMO purchase should alleviate concern over system liquidity and should pull down bond yields given demand- supply dynamics,” said Soumyajit Niyogi, associate director at India Ratings and Research. However, credit flows to respective sector will susceptible to perceptions and assessments by investors.”

In the past three trading sessions, cash deficit in the banking system has exceeded Rs 1 lakh crore daily. It hit as high as Rs 1.46 lakh crore on October 22, show data from Bloomberg. Advance tax payments primarily triggered such money outgo from the banking system.

RBI buying bonds aids demands for sovereign papers, which are normally sold through weekly central bank auctions. This tool is a preferred route for RBI as other measures like a CRR cut would have distorted bond yields.

Cash Reserve Ratio (CRR) is the portion of total deposits that banks are mandated to keep with the RBI. CRR, now pegged at 4 per cent, does not earn any interest income for banks.

This financial year the RBI has conducted about Rs 1.6 lakh crore of OMO purchases compared with Rs 90,000 crore OMO sales in the corresponding period last year in a cash surplus situation.

The bond market is gaining traction on two-counts; falling crude oil prices and OMO injection.

The benchmark yield dipped 11 basis points Tuesday pushing prices up. It closed at 7.35 per cent versus 7.46 per cent a day earlier.

Original Article

ET Markets


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