Open Market Operations by RBI
The Reserve Bank of India (RBI) conducted an Open Market Operation (OMO) purchase auction, receiving bids worth Rs 1.87 trillion against a notified amount of Rs 40,000 crore. The high demand led to a cut-off price set below the secondary market price.
- Public Sector Undertaking (PSU) banks were major participants in the auction.
- The RBI has purchased Rs 1 trillion in government securities through OMO auctions, with additional purchases made via screen-based OMOs and the secondary market.
RBI's Efforts to Infuse Liquidity
The central bank's actions are aimed at injecting durable liquidity into the banking system due to an ongoing liquidity deficit, which was Rs 1.77 trillion as per the latest data.
- The RBI announced more OMOs as a means to infuse durable liquidity, contrasting with the temporary nature of Variable Rate Repo (VRR) auctions.
- Recently, an overnight VRR auction infused Rs 1.33 trillion, and a 14-day VRR auction planned to inject Rs 75,000 crore.
Market Reactions and Economic Implications
Corporate bond yields have increased despite a 25 bps cut in the policy rate by the RBI's Monetary Policy Committee (MPC), largely due to tight liquidity conditions. Meanwhile, government bond yields have remained stable due to RBI's purchases.
- The yield spread between corporate and government bonds widened by 25 bps, with short-term yields rising more sharply.
- This has led to an inversion of the yield curve, where short-term yields exceed long-term yields.
Expert Opinions
Neelkanth Mishra, chief economist at Axis Bank, suggested measures the RBI could take to inject durable liquidity:
- Reduce the Cash Reserve Ratio (CRR) and Incremental Cash Reserve Ratio (ICRR).
- Conduct FX buy-sell swaps, OMOs, or Long-Term Repo Operations (LTROs).
He emphasized that the RBI should focus on easing tight liquidity conditions to enhance credit offtake and support growth rather than merely cutting the policy rate.