RBI Plans On Open Market Operations For The Festive Season (Image: x.com/@RBI)
On Friday, the Reserve Bank of India (RBI), announced its plan to consider the Open Market Operation sale of government securities. The Bank has not given any specified time for this. This move to manage the liquidity in the system has come in as a surprise for the bond market, and as a counter play, the yield on the 10-year government bonds went up 12 basis point to 7.34 percent, in anticipation of Open Market Operations (OMO) reigning in the system’s liquidity profile. The retail inflation stood at 6.83 percent in the month of August.
With the festival season at the threshold, the liquidity in the system is expected to tighten though the retail inflation stood at 6.83 percent. While announcing the monetary plan, RBI Governor Shaktikanta Das said, “going forward, while remaining nimble, we may have to consider OMO sales to manage liquidity, consistent with the stance of monetary policy. The timing and quantum of such operations will depend on the evolving liquidity conditions.”
The plan to mop out the excess liquidity in the system has come without a specific calendar date. On this surprise move, Suyash Choudhary, Head – Fixed Income, Bandhan AMC said, “this is especially so since the market understands that the best of liquidity is likely over the October-December quarter. Core liquidity may shrink enough by then for the RBI to not want to persist with OMOs from the next quarter. Thus, the risk of this additional supply is more near term, and this may weigh more on the minds of market participants,” reported the Indian Express.
The RBI Governor stressed on ‘active liquidity management,’ with the intention of keeping the inflation anchored at 4 percent. Amnish Aggarwal, head of research at Prabhudas Lilladher Pvt Ltd. Said, that the RBI’s approach signals to a more proactive stance and that it is not enough keeping the inflation below the 6 percent upper target range.
The Central Bank’s OMO is a tool to contain and manage the liquidity in the system. When the RBI wants to take away excess liquidity in the market, it resorts to the sale of government securities and when the RBI wants to unleash liquidity into the system when the system is in a tight condition, the Central Bank would buy securities from the market, releasing liquidity into the system. The OMO’s are considered as a tool to manage the money supply and inflation in the system. The mopping of liquidity could bring in a spike in the bond yields, as the RBI would be releasing more government securities into the system and the buyers of bond demanding more interest rates on these.
Over the past month, OMO sales have been going on in the secondary market, with the net sales reaching up to Rs 6,200 crore in September.
