RBI may Conduct OMO Purchases Worth ₹ 1 Lakh Crore This Fiscal
Move will help plug liquidity gaps and stop bond yields from firming up sharply: Experts
Mumbai: Market players expect more open market operations (OMOs) via bond purchase programmes would help offset the fallout of the 30-40 basis points spike in short-term rates at a time when liquidity in the banking system is drying up amid increased outflows.
“OMO purchases will nullify effects of advance tax outflows, GST payments and RBI intervention in currency markets,” said AjayManglunia,executivevicepresidentat EdelweissFinance,“WithoutOMOs,itmay distort the rate trajectory making future RBI monetary actions ineffective.”
Treasury bills, short-term sovereign debt instruments’ yields, have risen with primary market rates going up by about 35 basis points in past two to three weeks, dealers said. Commercial papers rates have increased 30-40 basis points across maturities up to one year. The RBI announced an OMO purchase of ₹ 10,000 crore last Friday. According to bond house PNB Gilt, RBI may conduct OMO purchase up to ₹ 1 lakh crore in the remaining period of this financial year till March 2019.
Companies and individuals have paid their advance tax by mid-September while Goods and Services Tax will be paid by 20th of every succeeding month. Tax payments collectively result in fund outflows from the banking system.
Liquidity or cash available in the banking system is i n def i c i t of about ₹ 20,000 crore. “Money market rates have risen appreciably over the past few weeks largely owing to market revising expectations with respect to monetary policy,” said Suyash Choudhury, head of fixed income at IDFC Mutual Fund. “Despite a near term benign CPI, market now expects multiple front-loaded rate hikes and tighter liquidity conditions.”
“At some point, it will be prudent for the RBI to push against these expectations. The latest OMO announcement is one such measure,” he said.
The RBI is said to have intervened in the currency market to arrest the rupee’s slide. Some state-owned banks were seen selling dollars on behalf of the central bank. This has sucked out cash from the banking system squeezing the liquidity further. The central bank sold $8.6 billion collectively in June and July to check the rupee’s sharp slide against the dollar.
“Without a regular dose of OMOs, bond yields could face the danger of further firming up sharply,” said Vijay Sharma, executive vice president at PNB Gilts. “This (liquidity) is essential to plug the potential liquidity gap as well as the demand supply gap in the government bonds market.”
Retail inflation was at 3.69% in August compared to 4.17% in July. The gauge was lower than expected. This year, the benchmark bond yields have swung in a wide range of 106 basis points and hit a four-year high of 8.19% last week.
RBI sold $8.6 billion collectively in June and July to check the rupee’s sharp slide