MUMBAI (TIP): To ease the current liquidity crunch which could also help in lowering yields, the RBI on February 25 announced it will infuse up to Rs 12,000 crore into the market through open market operations (OMOs) on March 3.
At times, the central bank uses these OMO purchases to buy back government securities (G-secs) from the market, which infuses liquidity into the system and helps soften yields in the gilt market. From December 7 last year, the RBI has already infused Rs 30,000 crore into the system through OMOs. In addition, the government has also infused liquidity by buying back G-secs and inflation-indexed bonds worth about Rs 36,500 crore in the last three months.
Surprisingly, however, the central bank did not announce the tenures of the G-secs that it will purchase through the OMO on March 3. “The securities identified for the OMO would be announced in due course,” the RBI notice said.
Bond dealers feel this may be an indication that the government is likely to overshoot its 3.5% fiscal deficit target for 2016-17 when it announces the budget on Monday. In such a situation, under normal circumstances, soon after the announcement of the fiscal deficit numbers the bond market would have faced strong selling pressure due to expected higher borrowing by the government next fiscal.
However, “by not announcing the papers it would buy in the OMO, the RBI is keeping a check on bond market players from selling aggressively after the budget”, according to a bond market analyst. If bond market players sell and the RBI announces it will buy back some of the most sold papers, the traders would suffer a loss. And hence, bond dealers would be fearful of selling even if the fiscal deficit numbers disappoint the market.
The RBI’s decision for an OMO came on the back of a sharp rise in yields for G-secs across the board and also state loan papers. On Tuesday, yields on state loans had shot up to 8.88%, a 15-month high, while on Thursday in the G-sec market, all but one paper with tenures of more than four years went past the psychologically important 8% mark. The only paper, the new 10-year paper, closed at 7.86% -a life high for it, since very less floating stock of this bond is available in the market, bond dealers said.