The Reserve Bank of India (RBI) will infuse around Rs 3 lakh crore into the banking system over the next month via open market bond purchases (OMOs) and a buy/sell dollar-rupee swap, it said on Tuesday.
The measures include bond buys worth Rs 2 lakh crore through OMOs, conducted in four tranches of Rs 50,000 crore each, and a three-year dollar/rupee buy/sell swap auction of $10 billion, which will be held on January 13.
RBI on OMO
In a separate press release, the RBI said the papers involved in the first OMO tranche range from 2029 to 2053. The OMO auctions will be held on December 29, January 5, January 12, and January 22.
The measures are expected to both infuse rupee liquidity into the banking system while also pulling out excess dollar liquidity that had contributed to a surge in dollar-rupee forward premiums, prompting bankers to urge intervention by the central bank.
What did Madhavankutty G say?
“Considering outflows on account of GST and advance tax, along with currency leakage, OMOs worth Rs 2 lakh crore were essential. The RBI likely intervened with over $5 billion in dollar sales to maintain the rupee within the 89-90 range, creating a need for further liquidity support,” said Madhavankutty G, chief economist at Canara Bank.
“The RBI delivered a larger-than-anticipated injection starting from December-end, which is positive for the market. Moreover, forex swap will also help cool forward premium,” said Rajeev Pawar, treasury head at Ujjivan Small Finance Bank. The one-year forward premium touched three-year high at 3.12% on Tuesday as banks rushed to convert excess dollar holdings via swaps to fulfill regulatory mandates by year-end.
Pawar said the government bond yields will likely drop by 5 basis points (bps) as an immediate reaction. However, higher issuances by states in the fourth quarter will continue to weigh on the market.
“We would see the 10-year benchmark bond yield moving below 6.60% mark in early trades on Wednesday. After that, the move will depend on the choice of papers for next week’s OMO,” the treasury head at a private sector bank said.
The system liquidity has been under strain due to forex interventions and tax outflows. The liquidity has been in deficit since December 16 – it stood at Rs 54,852 crore as on December 22.
The RBI has injected Rs 1.5 lakh crore into the system so far in December. It conducted bond purchases worth Rs 1 lakh crore and forex swaps of $5 billion. Market participants were of the view that the measures were not enough considering the higher tax outflows and forex intervention.