The Reserve Bank of India has decided to infuse more liquidity into the system against the backdrop of persistently high bond yields.
The central bank will purchase government bonds worth Rs 10,000 crore via open market operations, it said in a press release today. The decision is “based on an assessment of prevailing liquidity conditions and also of the durable liquidity needs going forward,” the RBI said.
The RBI’s decision comes at a time when liquidity is close to neutral and overnight money market rates have remained range bound. Bond yields, however, have remained elevated despite various measures taken by the government and the central bank to bring down rates.
To add to that, the pace at which currency in circulation is rising has picked up and foreigners have turned sellers in the Indian market.
“The combination of rising currency in circulation, a widening current account and slowing inflows into the capital account have necessitated open market operations,” said Soumyajit Niyogi, associate director at India Ratings. Niyogi added that the RBI’s decision should help bring down bond yields when markets open on Monday.
Traders will now be watching to see whether the RBI announces regular bond purchases through the OMO route or if the Rs 10,000 crore purchase announced on Friday is a one-off.
While the announcement is likely to cool G-sec yields in the immediate term, the extent of further reduction in yields would take a cue from whether this is a one-off, or whether additional OMO purchases would be announced going forward, Aditi Nayar, principal economist at ICRA said in an emailed statement.