After a gap of six months, RBI will soak up surplus liquidity through the government bond sale by open market operations in addition to its various repo tenders, indicating the central bank is not comfortable with the liquidity situation.
On Friday, RBI had said it would put an offer for sale for four government bonds with tenures between three and twenty years through open market operations totalling R10,000 crore. RBI had last conducted bond sale auction via OMO in December 2014.
Market participants say the choice of OMO bond sale indicates the liquidity surplus can be more durable and RBI cannot manage the same with repo tenders, designed to soak up liquidity which is more transient in nature.
Liquidity in the banking system, in deficit for last two years, has now turned into surplus with banks parking more funds at the RBI’s reverse repo window than borrowing from the repo tenders.
As of Friday, banks had parked over R50,000 crore with the central bank while they had borrowed only R40,000 crore with RBI through various repo tenders. Overnight call money rate has already hit a two-year low of 6.90% and has been hugging the repo rate of 7.25%. Rates on commercial papers and certificates of deposit have already fallen 15-20 basis points.
“If the liquidity surplus was to continue, even with the operating rate at 7.25%, there is no doubt, short-term yield would drop further, deposit rates would come down, as would lending rates and true transmission of RBI’s rate cuts would ensue,” said Ananth Narayan G, regional head of financial markets for South Asia at Standard Chartered Bank.
But, bond traders were flummoxed with the choice of sterilisation as OMO sale of long-term bonds would drive up yields. Already, the benchmark 10-year bond yield has risen 6 basis points to settle at 7.87% on Monday. Traders said that the bond market had expected a more demure choice of either sale of short-term bonds or through sale of forward dollars from the forex market.
“If short-term market stabilisation bonds had been opted for, the impact would be limited to the short-end of the yield curve,” said Ashish Parthasarthy, head of treasury at HDFC Bank.
* Banking system liquidity is in surplus of about rs 10,000 crore since July 1
* Overnight call money rate hit two-year low of 6.90% on Friday
* RBI announces rs 10,000 crore OMO bond sale to soak up liquidity, after a gap of six months
* Bond market expected liquidity sterilisation from RBI, but surprised by method