The Reserve Bank of India (RBI) has announced that it will buy government securities worth R10,000 crore through the open market on October 25. This would be the 9th open market operation conducted by the central bank this fiscal year.
The central bank has already bought government securities worth over R1 lakh crore so far this fiscal through 8 open market operations.
Between April 1 and October 20, the 10-year benchmark yield has fallen by around 65 basis points, although this reduction was partly due to the introduction of a new 10-year gilt in the interim. The 5-year, and 3-year gilts saw a fall of 66 and 61 bps respectively.
In his final monetary policy review as the governor of the RBI, Raghuram Rajan had observed that liquidity conditions had eased significantly during June and July on the back of increased spending by the government but had also pointed out that the regulator’s OMOs had also helped in easing liquidity conditions.
“The injection of durable liquidity through purchases under open market operations (OMOs), amounting to R80,500 crore billion so far, also helped in easing liquidity conditions, bringing the system-level ex ante liquidity deficit to close to neutrality,” Rajan had said.
As a result of RBI purchasing bonds, banks across the system had surplus cash in hand, which led to increased inflow into non-SLR securities like commercial paper and corporate bonds. In the period under review, yields on AAA-rated 10-year corporate bonds fell by over 60 bps and are currently hovering around the 7.75%
Yields on A1-rated 3-month commercial paper fell even more, around 95 bps, to 6.92% as measures by the RBI to improve liquidity in the money market resulted in increased investment in these instruments by banks and mutual funds.