Mumbai, Sept. 25: The Reserve Bank of India today said it could conduct open market operations (OMOs) to meet the tight liquidity condition. The move is also aimed at pushing down yields, which have spiked since the mid-quarter review of the monetary policy.
The banking system is reeling under a liquidity crunch, with shortfall estimated at over Rs 1 trillion.
Since the monetary policy review last Friday, yields on government securities have risen more than 60 basis points. This has been attributed to multiple factors, including the surprise 25-basis-point rise in the repo rate and indications that there might be a few more rate hikes by the RBI in the future.
Repo rate is that at which the apex bank provides short-term liquidity to lenders.
Yields have also moved up because of the uncertainty surrounding the government’s borrowing programme for the second half. The Centre has announced that it will borrow Rs 2.35 trillion during October-March. This translates into an average weekly borrowing of Rs 15,000 crore. It is felt that the fresh supply of government paper could impact the liquidity condition.
The RBI today tried to allay negative sentiments in the bond market by pointing out that it would take steps to ensure that liquidity was available.
“The Reserve Bank is closely and continuously monitoring liquidity conditions and will take actions as appropriate, including open market operations, to ensure that adequate liquidity is available to support the flow of credit to productive sectors of the economy,” the RBI said in a statement. In OMO, the central bank buys securities from banks, thus injecting liquidity into the system.
The RBI added that it had begun a calibrated unwinding of the measures taken since July to restore normalcy to financial flows.
It is now injecting about Rs 1.5 trillion into the system on a daily basis through the liquidity adjustment facility (LAF), the export credit refinance facility and the marginal standing facility (MSF).
LAF is a facility through which banks draw money when they are short or where they park excess funds with the apex bank (in case of excess liquidity) on an overnight basis against the collateral of government securities, including state government bonds. MSF is an emergency liquidity facility under which banks can obtain funds at a higher rate from the RBI.