The Reserve Bank of India (RBI) has decided to infuse ₹36,000 through open market purchase of bonds in October as liquidity has tightened due to an uptick in loan demand in the festive season.
“Based on an assessment of the durable liquidity needs going forward and the seasonal growth in currency in circulation observed in build-up to the festive season, RBI has decided to conduct purchase of Government securities under Open Market Operations (OMOs) for an aggregate amount of ₹360 billion in the month of October 2018,” RBI said adding that the auctions would be conducted during the second, third and fourth week of October. Last week, RBI had reassured the financial markets that it stands ready to meet the liquidity requirements of the system.
“The OMO amount stated above is indicative and RBI retains the flexibility to change it, depending on the evolving liquidity and market conditions,” the central bank said.
Market participants said more liquidity infusion is required to address the cash deficit.
“While the recent event-based squeeze in money market liquidity has been in focus, overall liquidity was due to remain tight in FY2019, especially given the FX reserves depletion,” Kotak Securities said in a note to its clients.
“We expect the RBI to do OMO purchase of around ₹1.5-2.0 trillion to alleviate the stress. However, it is unlikely to completely offset the liquidity tightness implying that the short-term rates would still likely remain elevated,” the note added.
The yield on 10-year benchmark government bonds fell three basis points to end the day at 7.99%.
Kotak Securities has maintained its call that benchmark 10-year yield will be in a broad range of 7.75-8.25% for the second half of the current financial year.