Indian two thousand and five hundred rupee banknotes are arranged for a photograph in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)

RBI Increases Bond Purchases To Inject Liquidity

The Reserve Bank of India said it will buy more government bonds than planned earlier as it looks to address the financial sector’s liquidity crunch.

The central bank will now conduct two open market operation purchases of Rs 15,000 crore each in December, scaling up its total liquidity injection to Rs 50,000 crore for the month, it said in a media statement today. It had earlier planned to purchase Rs 40,000 crore worth of government bonds during the month.

It will also buy government bonds worth Rs 50,000 crore in January 2019 through five auctions of Rs 10,000 crore each. The RBI’s decision is after purchases of Rs 36,000 crore in October and Rs 40,000 crore in November.

The additional Rs 10,000 crore this month has cheered the markets as it confirms the RBI’s availability to pump up the markets, Harihar Krishnamurthy, treasurer at FirstRand Bank, said, adding it would partly offset the liquidity shortfall after advance tax outflows.

After the outflow of advance tax payments, the market is settling in on a liquidity shortfall of Rs 1,40,000 crore as on Dec. 18. That’s not a very comfortable situation. The open market operations will sort this problem to a certain extent.
Harihar Krishnamurthy, Treasurer, FirstRand Bank.

In its bi-monthly policy meeting earlier this month, the RBI had reassured the market of an “elevated” level of bond purchases until March.

Defaults in repayments by infrastructure finance firm IL&FS Ltd. and its subsidiaries led to fears of a contagion in the financial and credit markets. This led to concerns that non-banking lenders would be unable to refinance their market borrowings, impairing growth. The risk stemmed out of tight liquidity conditions followed by a trust deficit due to the defaults.

The RBI said that it will continue to monitor the liquidity conditions and depending on those it will consider a similar quantum of OMO purchases till the end of March 2019. “The exact calibration of the quantum of OMO would depend on sustained changes in the behaviour of currency in circulation, the magnitude of sterilisation operations for RBI’s forex operations and other relevant factors.”

It added that the amount stated is indicative and RBI has the flexibility to change it based on the evolving liquidity and market conditions.

“We expect that the announcement on liquidity infusion is likely to lead to further dip in the bond yields today,” said the treasury team at HDFC Bank in a report on Wednesday. The bank expects “prominent downside” to its earlier forecast of 7.3 percent on the 10-year bond yields.

“On account of sharp decline in oil prices and somewhat dovish signals from the Fed, there could be downside risk to our call for both the Rupee and the bond yield. The downside is likely to be prominent in case of the bond yields as liquidity infusion from the RBI has been more than anticipated.”

India’s 10-year bond yield fell 8 basis points to 7.26 percent, the lowest since April 2018, after the central bank’s statement.

RBI Increases Bond Purchases To Inject Liquidity