More open market bond sales likely
The Reserve Bank of India (RBI) might announce more open market operation (OMO) sale of bonds if overnight rates do not trade close to the repo rate, at which it lends to banks.
Last month, the central bank had announced such an open market sale (OMO) of bonds to suck out excess liquidity. Experts believe more of these are likely.
However, RBI has also said it wants to ensure adequate liquidity, to ensure transmission of changes in rates. “We have to ensure (this) and will try to keep the call money and broader money market rate as close to the policy rate as possible,” said deputy governor Urjit Patel in a post policy review interaction with journalists.
In July, on certain days, the weighted average call money rate had moved much below the repo rate, which is 7.25 per cent. The OMO sale announcement in July had scome as a surprise to the market and government bond yields had climbed up.
“Sporadic OMOs can happen from time to time, depending upon RBI's assessment of excess liquidity. The policy was indicating RBI is comfortable with the current situation because they think it will help transmission, provided overnight rates are anchored around the policy rate,” said Suyash Choudhary, head-fixed income, IDFC Mutual Fund.
The yield on the 10-year benchmark bond rose on Tuesday to end at 7.84 per cent, compared with the previous close of 7.81 per cent.
According to market sources yields climbed today because the market was expecting some enhancement in the Foreign Portfolio Investors (FPI) limit for investment in government debt in the policy and that did
not happen. Currently the FPI limit in g-sec is $ 30 billion. The street feels that the FPI limit for g-sec should be fixed in rupee terms instead of dollar. This would provide more headroom for FPI investment in g-sec.
Meanwhile, the weighted average call money rate stood at 7.06 per cent on Tuesday, from 7.02 per cent on Monday.
Another instrument of mopping excess liquidity is longer tenure reverse repos. “We would like to use longer term reverse repos but the market appetite for these has not been significant. Rehypothecation might be required to make it more attractive. We are examining (it),” said RBI governor Raghuram Rajan, in a post policy conference call with analysts and researchers.