RBI announces outright purchase of Rs 10k-cr of bonds from secondary mkts

 The Reserve Bank of India (RBI) on Thursday announced an outright purchase of Rs 10,000 crore of bonds from the secondary markets, to be conducted on September 24.

So far, the central bank had been planning to simultaneously buy and sell bonds in equal amounts, with an intention to keep the operation liquidity neutral. However, this is the first time in this fiscal that the central bank announced an outright open market operations (OMO) purchase. In OMOs, RBI buys or sells bonds from the secondary markets.

The RBI had carried out an outright OMO purchase operation of Rs 15,000 crore on March 26. After that, all the OMOs were simultaneous buy and sell operations, in which the central bank bought long term securities and sold short-term securities, also called ‘Operation Twist’ in market parlance.

In the latest round of outright OMO purchase, the RBI would be buying bonds maturing between 2026 and 2031. The central bank said it was doing so in view of the “current liquidity and financial conditions.”

Well, the liquidity surplus in the banking system has indeed come down from their recent highs of Rs 7 trillion to Rs 4.67 trillion as on Wednesday, but it is still at a huge surplus. However, investors now expect the banking system to be flush with liquidity, and as such a substantial reduction in surplus liquidity causes flutters and puts pressure on the bond yields. RBI may have wanted to arrest that before yields climb up.

“We still have a long way to go insofar as the borrowing programme is concerned,” said R K Gurumurthy, head of treasury at Lakshmi Vilas Bank.

The government’s annual borrowing target is Rs 12 trillion, of which more than half has been borrowed at near 6 per cent yields, which is a decade low cost of borrowing for the government, RBI governor Shaktikanta Das said on Wednesday. The 10-year bond yield closed at 6.03 per cent on Thursday.

However, the outright OMO announcement has important ramifications for the future. The bond market has been demanding an OMO calendar, and expects the central bank to chip in with at least Rs 2-3 trillion of OMO support to accommodate the heavy borrowing programme. This is also a kind of indirect monetisation, and the central bank has tried to avoid that. However, the OMO announcement removes any such doubt that it is the beginning of many such operations to come.

“If the RBI goes for large OMOs, or gives a calendar, or even announces its intent to do more that could cool yields a bit and help a large borrowing programme, in second half, sail through without pushing yields higher,” said Harihar Krishnamurthy, head of treasury at First Rand Bank.

With the announcement of the OMO, the central bank also said it would convert some bonds maturing between April, 2021 and December 2022 for securities maturing between 2031 and 2060. The RBI said it conducted a special OMO of simultaneous purchase and sale of Rs 10,000 crore.