In all the four OMOs, the central bank has been selling bonds to wipe out excess liquidity
Reserve Bank of India (RBI) on Tuesday announced the sale of government bonds worth Rs 40,000 crore through open market operations (OMOs) this year to wipe out of the excess liquidity in the banking system.
The central bank is targeting the excess liquidity to the tune of Rs 3 lakh crore in the banking sector through the OMOs. This is a process whereby RBI sells or buys government bonds to suck out excess liquidity in the banking system.
In all the four OMOs, RBI has been selling bonds to wipe out excess liquidity.
However, bankers warn excessive supply of government bonds may push up yields and keep borrowing cost artificially high.
Ashutosh Khajuria, executive director, Federal Bank, said, "It may not be able to announce too many OMOs as the excess supplies are likely to push up the yields and dim the prices. Already the ten-year government bond is trading at 6.50% when it should be at least 0.10% lower at 6.40%. The excess liquidity is coming through interventions in the forex market to support the rupee."
During the current financial year, RBI has added Rs 1.70 lakh crore to the forex reserves by buying dollars pushing up the price of the rupee, Khajuria said.
On Friday, RBI announced the sale of government securities worth Rs 10,000 crore, the fourth in this calendar year. These bonds have varying maturities. The shortest bond will mature in 2020 with a coupon rate of 8.19%. The other bonds are of longer maturities of 2022, 2024, 2026, 2030 with coupon rates of 8.13%,7.35%, 8.15% and 8.97%, respectively. However, RBI has not mentioned how much quantum of these bonds will be sold.
When demonetized notes returned, banks ran a big liquidity surplus at Rs 8 lakh crore, much of this deposit overhang has flowed out. This excess liquidity was absorbed through liquidity management measures like the reverse repo under the Liquidity Adjustment Facility (LAF), which is an overnight deposit of money by banks with RBI. Incremental cash reserve ratio (CRR) and issuance of cash management bills (CMBs), which are short-term treasury bonds under the market stabilisation scheme (MSS) were the other ways to mop up excess liquidity. RBI was absorbing about Rs 355,800 crore on an average daily in the first quarter of 2017-18.
Bankers said for the OMOs RBI requires an adequate stock of domestic securities in the portfolio of the central bank and large scale operations can potentially influence yields that may not be consistent with the stance of monetary.
However, some bankers say RBI will come out with more OMOs to manage the excess liquidity.
N S Venkatesh, executive director at Lakshmi Vilas Bank, said, "A large portion of the liquidity may have a permanent structure to it so we could expect more OMO sales current tools of liquidity tightening may be inadequate. This could keep bond yields somewhat volatile as the benchmark yields are at the lower end of this cycle's range."
LIQUIDITY MOP-UP
- In all the four OMOs, the central bank has been selling bonds to wipe out excess liquidity
- RBI has added Rs 1.70 lakh crore to forex reserves by buying dollars in FY18
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