The Reserve Bank of India (RBI) on Wednesday announced it will conduct open market operation (OMO) purchases worth Rs 10,000 crore in order to ensure all market segments remain liquid and stable, and function normally.
This means the central bank will purchase securities from the market that will absorb the supply of G-sec from the market. The move comes in the wake of significant selling by foreign portfolio investors (FPIs) who sold close to $5-billion worth of Indian debt on a net basis in the last five consecutive sessions.
It is noteworthy that the bond market had rallied in recent times even as central banks around the world cut interest rates and US treasury yields fell to unprecedented levels. In March, for instance, the benchmark yield fell to as low as 6.065%.
RBI said with the heightening of Covid-19 pandemic risks, certain financial market segments have been experiencing a tightening of financial conditions as reflected in the hardening of yields and widening of spreads. Indeed, corporate bond spreads have risen in recent times, with fund managers estimating the widening at 40-100 basis points across maturities over the last few weeks.
The OMOs will be conducted on Friday where the central bank has notified its intent to purchase securities that are maturing between 2022 and 2025.
Manish Wadhawan, managing partner at Serenity Macro Partners, told FE that FPIs have been selling a lot of government securities in the recent past and this extra supply hitting the market puts pressure on the yields. “Moreover, yields have been rising in the corporate bond market where liquidity has been a concern in current times. The OMO purchases conducted by the RBI will help alleviate such pressures and maintain stability in the debt market,” he said.
On Wednesday, the central bank also notified the results of its 3-year long-term repo operations (LTROs) where it received bids worth Rs 27,096 crore against a notified amount of Rs 25,000 crore.