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

The Economic Times - - Companies: Pursuit Of Profit - Saikat.Das1@ times­group.com

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

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