Reserve Bank hints at more OMOs to infuse liquidity

The apex bank has undertaken nearly Rs 78,000 cr of operations.

The Reserve Bank of India (RBI) has hinted at more open market operations (OMOs) to ease tight liquidity conditions in the banking system.

RBI Deputy Governor Subir Gokarn, who is in charge of monetary policy at the Reserve Bank, also said the RBI’s choice of securities to buy in OMOs is not aimed at reducing the cost of borrowing for the government, but to ensure that there is adequate liquidity in the system.

“The aggregate objective of OMOs is to put in a certain amount of liquidity into the market and not help the government borrowings,” Gokarn said, talking to reporters at a global investor summit organised by HSBC here.

“The choice of securities is driven by the need to be reasonably certain about achieving the aggregate number. So these are two separate decisions. Reality of the situation is OMO is driven by liquidity shortage, not by the government borrowing,” he said.

“These are really two separate discussions. You can call it private placement or quasi private placement, regardless of what the mix of securities is. It doesn’t matter, but that’s not the case,” he said, in response to a query if OMOs are not a kind of quasi-private placements aimed at helping government bond yields.

Speaking to a business channel separately, Gokarn also ruled out any room for aggressive rate cuts as in 2008 following the fall of the Lehman Brothers, given high commodity prices and sticky inflation, though he admitted that easing of interest rates is the next logical step for the central bank against the backdrop of a growth slowdown as well as lessening inflationary pressure.
“That sort of room for very aggressive and very rapid rate cuts simply does not exist in today’s situation. The behaviour of commodity prices is and remains a risk to our inflation and growth outlook,” he said.

“There are still risks out there which may not be out of the system and we will take a judgement based on the overall sense of stability and return to normalcy,” he said.

The central bank has undertaken nearly Rs 78,000 crore worth of OMOs in the recent months as the system was quite starved of funds, with the banks’ daily borrowing from the central bank’s special borrowing window averaging nearly double the 1 per cent liquidity deficit that the bank is comfortable with.

As of today, the liquidity deficit is nearly Rs 1.2 trillion, Gokarn said, offering similar operations if the situation warranted. Explaining the rationale behind the OMOs, Gokarn said, “The reality of the situation is that OMOs are being driven by the liquidity shortage. It is not driven by the government borrowing requirements. So, I want you to think about an alternative scenario where the repo borrowing is less than Rs 600-650 billion on a daily basis and yield on the government bond is high. Will RBI do OMOs under those circumstances? The answer is no.”

Presenting an alternative scenario where banks’ repo borrowing is above Rs 1-1.2 trillion and T-bill yields are low, Gokarn said in such a circumstance, RBI will continue to conduct OMOs as “the driver is liquidity gap and not government bond yields”.

On whether the RBI is using the CRR and OMOs as liquidity tools, he said, “CRR and OMOs are not substitute for each other. The OMOs are quick, short-term and easily implementable instruments, while the CRR has monetary implications and we cannot use it in the same tactical way as we use OMOs.”