Longer-term variable rate repo/reverse repo possible substitutes for open market operations

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Published: September 28, 2019 1:24:36 AM

Dwijendra Srivastava, CIO-debt at Sundaram Asset Management, said that in the recent past, the market has largely seen the RBI to be on the purchase side of OMOs

A section of the market believes that the RBI’s usage of such tools may lower the central bank’s OMO activity — something that always had an impact on bond yields whenever executed.

The Reserve Bank of India (RBI) on Thursday released the liquidity management framework, in which it said that it would be beneficial to develop alternative tools to achieve durable liquidity impact where outright operations are not feasible or desirable, due to reasons like their impact on yields.

The report released by the internal working group recommended that as an alternative to open market operation (OMO) purchases, longer-term variable rate repos, longer than 14 days and up to one-year tenor, be considered as a new tool for liquidity injection if system liquidity is in a large deficit. Similarly, longer-term variable-rate reverse repos could be used to absorb excess liquidity. As these are possible substitutes for OMOs, these instruments should be operated at market determined rates.

A section of the market believes that the RBI’s usage of such tools may lower the central bank’s OMO activity — something that always had an impact on bond yields whenever executed.

The central bank does OMO purchases to infuse liquidity in the system where as it does OMO sales to suck the excess liquidity from the system. Sources say that central bank may be of the view that too much OMO activity can impact the yield curve substantially and hence other instruments have to be used.

Dwijendra Srivastava, CIO-debt at Sundaram Asset Management, said that in the recent past, the market has largely seen the RBI to be on the purchase side of OMOs. “Now, if the OMO activity reduces or is replaced by longer term repos, then the salutary impact on bond yields will mitigate to that extent,” he said.

In the liquidity report, the RBI indicated that where outright operations like OMOs are not feasible or desirable (e.g., because of their impact on yields), it would be beneficial to develop alternative tools to achieve the durable liquidity impact.

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