RBI Announces More Bond Purchases, Lures Long-Term Foreign Inflows

The Reserve Bank of India, through two separate announcements made on Friday, has moved to ease liquidity conditions further. The central bank will continue bond purchases in June. Separately, it will also also reopen a window for longer-term foreign portfolio investments, which, in turn, could give the central bank more room to infuse rupee liquidity by buying dollars.

Open Market Operations Continue

The RBI will purchases Rs 15000 crore worth of government bonds in June 2019 under its open market operation (OMO) programme, it said in a release. This is being done “based on a review of the evolving liquidity conditions and assessment of the durable liquidity needs going forward,” the central bank said.

So far this year, the RBI has conducted OMO bond purchases to tune of Rs 25,025 crore in a bid to address tight liquidity conditions. Liquidity has remained tight due to higher currency-in-circulation in the run-up to the general elections. A shortfall in deposit growth compared to credit growth has also meant that the financial system has seen a persistent liquidity deficit.

In FY19, the RBI infused a total of Rs 2.99 lakh crore through OMO purchases.

Apart from bond purchases under the OMO, the RBI has also infused nearly Rs 70,000 crore in liquidity through two rounds of long term forex swaps in March and April.

While liquidity remains in deficit mode, many expect conditions to ease now that the election process has concluded and government spending will pick up.

On-Tap Window Under Voluntary Retention Route

In a separate release, the RBI said that ‘voluntary retention route’ for foreign portfolio investors would be reopened. A limit of Rs 54,606 crore has been set for inflows via this route. This is over and above the overall FPI limits set for the debt markets.

Under the VRR route, FPIs can purchase government and corporate bonds with more liberal conditions attached, as long as they are willing to hold the investment for three years.

The VRR window was first opened from March 11 till April 30. In that period, Rs 20,393 crore in corporate bonds were purchased under the scheme. According to market participants, FPI have used the route for corporate bonds, where the scheme offers more advantage as compared to government bonds. In some cases, parent firms of multinational companies have used the route to infuse funds into local operations.

Should inflows under the route pick up, the RBI could have another route to infuse liquidity. Typically, the central bank absorbs excess dollar flows, which in turn adds rupee liquidity to the system.