The Reserve Bank of India (RBI) on Thursday said that it would inject up to Rs12,000 crore through open market operations’ purchase of government securities through an auction on December 4, 2012.
This is the first OMO auction that the RBI has announced in the last five months.
Banks have been borrowing more than Rs1 lakh crore daily from the RBI’s liquidity adjustment facility window for over a fortnight now.
This is way beyond RBI’s comfort zone of 1% of net demand and time liabilities.
The move is consistent with the stance of monetary policy and based on the current assessment of prevailing and evolving liquidity conditions, said RBI.
The central bank will accept the current ten-year benchmark government bond 8.15%, a decision that may ensure higher success of the auction. Other than this, RBI will also accept government securities maturing in 2018, 2020 and 2027. There is no security-wise notified amount, RBI said.
Yields on the ten-year benchmark government bond fell by 10 bps over the past month in anticipation of some liquidity measure by the central bank.
The overnight call money rate had also gone up to 8.15% reflecting the stress on current liquidity condition. “We may see yields falling to around 8.15% initially due to the OMO announcement,” said N S Venkatesh, head of treasury at IDBI Bank.
Market participants said the move signals RBI’s proactive approach to maintain liquidity so that credit flows to productive sectors of the economy. Recently, RBI deputy governor HR Khan had assured of some liquidity easing measure if tightness stayed long. He had said that the main reasons were increase in currency with public, build-up of government cash balances and wedge between deposit and credit growth.
Also, this could be the first of a series of OMOs that may be seen in coming months. However, if liquidity tightness persists, the RBI may provide permanent relief by cutting the cash reserve ratio. RBI has reduced cash reserve ratio or the amount that banks are mandated to keep with it by 175 bps in last 12 months. At present, the cash reserve ratio is at 4.25%.