The Reserve Bank of India announced that it will conduct open market operations (OMO) to purchase government securities worth Rs. 10,000 crores. This is the second such purchase of the month.
RBI on Monday said, “Based on an assessment of prevailing liquidity conditions and also of the durable liquidity needs going forward, the Reserve Bank has decided to conduct purchase of government securities under Open Market Operations for an aggregate amount of ₹ 100 billion on September 27, 2018 (Thursday) through multi security auction using multiple price method.”
RBI Announces OMO Purchase of Government of India Dated Securitieshttps://t.co/RbtZeBw2Jl
— ReserveBankOfIndia (@RBI) September 14, 2018
The yield on the benchmark bond was the highest of the five sessions.
In a report, Merrill Lynch, Bank of America, said that OMO by the central bank can help contain the domino effects of liquidity tightening in the financial markets.
“The combination of rising currency in circulation, a widening current account and slowing inflows into the capital account have necessitated open market operations,” said experts at India Ratings.
The liquidity deficit is rising due to advance tax outflows, increased demand during festive season, intervention in currency markets and possibly an approaching election season when currency demand increases. With such ongoing scenarios, the deficit has moved closer to Rs 1.5 lakhs.
Also, the swinging stock market due to debt defaults by diversified IL&FS group and worries about non-banking financial companies(even though the country’s largest lender SBI assured lending support to the NBFC sector) has created a need for OMOs.
The market expects the outflows of another Rs 1,00,000 crore on account of CAMPA funds moving to the government account.
In a report, Kotak Mahindra Bank estimated that the RBI would need to purchase bonds of over Rs 1.5-2 lakh crore by March 2019. These bond purchases by the RBI could support the Rupee by lowering yields and reducing foreign portfolios from the debt markets.