Mumbai, Aug. 20: The Reserve Bank today said it would buy back government bonds worth Rs 8,000 crore, to ease liquidity and ensure adequate credit flow to the productive sectors of the economy.
It also gave in to the requests by banks to shift their bond holdings in the available-for-sale (AFS) category to the held-to-maturity (HTM) category, which will help the lenders to avoid huge treasury losses.
Meanwhile, in signs of an imminent revival of overseas interest in government securities, a Sebi auction for FII investment limits in such bonds worth $9.34 billion received bids amounting to $10.4 billion today.
The slew of steps taken by the RBI since July to rescue the rupee had led to the yields on government securities rising to a five-year high. The liquidity tightening measures were also followed by a hike in lending rates by some banks.
A spike in yields exposes banks to mark-to-market losses.
Lenders need to make a provision for the depreciation of bonds in the AFS category. Bonds in the HTM category do not require such provisions.
In a late evening circular today, the central bank pointed out that its recent steps towards liquidity tightening were meant to raise the short-term interest rate and curb exchange rate volatility.
However, the apex bank added, it had no intention to harden long-term interest rates, which will impact the flow of credit to the productive sectors of the economy.
Therefore, in what is seen as a bid to soothe the frayed nerves in the bond and money markets, the RBI said it would purchase government bonds worth Rs 8,000 crore through open market operations (OMO) on Friday. It will also calibrate such purchases both in terms of the amount and frequency as required.
Besides, it would also calibrate the issue of cash management bills (CMBs), including scaling them down to keep the money market rates around the marginal standing facility (MSF) rate of 10.25 per cent.
MSF is the emergency facility through which banks can get liquidity support from the RBI at a higher rate.
Nearly a fortnight back, the central bank had announced plans to float CMBs to raise Rs 22,000 crore every Monday, thereby sucking out rupee from the system in an effort to dampen exchange rate volatility.