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Reserve Bank has more room for bond buying as India’s banks return cash

Last Updated 18 September 2020, 05:32 IST

By Subhadip Sircar

Indian banks are returning money they borrowed from the central bank earlier this year, boosting the monetary authority’s capacity to make more direct purchases of government bonds.

The Reserve Bank of India on Thursday said it would buy Rs 10,000 crore ($1.4 billion) of bonds from the secondary market on Sept. 24 in the first such direct purchase in six months. This marks a departure from its preference so far this year for Federal Reserve-like Operation Twists.

While direct open market operations end up adding cash to the banking system, twist operations are typically liquidity neutral as they involve simultaneous buying and selling.

But traders said there is more scope for direct OMOs now because banks are taking the option to return about Rs 1.25 lakh crore they borrowed from the RBI in February and March.

These funds were borrowed when the repurchase rate was at 5.15%, making it more attractive for banks to return it now and look to borrow again at a lower rate. So far, about Rs 74,300 crore has been repaid in three tranches and the remaining money is expected to be repaid by Sept. 18.

This creates more space for OMOs at the same time as a run down in the RBI’s stock of Treasury bills acts as a constraint on twist operations, said Shailendra Jhingan, chief executive officer at ICICI Securities Primary Dealership Ltd. In Mumbai.

The RBI has to keep an eye on how much surplus banking liquidity it wants amid rising inflation. Consumer prices rose 6.7% in August, exceeding RBI’s upper limit of 6% for a fifth month.

“The RBI has kept banking liquidity in a surplus of 6-7 trillion rupees in the past three-four months,” said Pankaj Pathak, a fixed income fund manager at Quantum Asset Management Ltd. in Mumbai. “If it wants to maintain similar levels of liquidity, it will open up space for 1-1.5 trillion rupees of OMO.”

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(Published 18 September 2020, 04:37 IST)

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