RBI to suck out Rs 10k crore from markets

Close on the heels of foreign exchange reserves swelling by $4 billion (Rs 33,580 crore), the Reserve Bank of India (RBI) has decided to suck out liquidity from the economy, by conducting sale of government securities under Open Market Operations (OMO) for an aggregate amount of Rs 10,000 crore.

In a circular issued on Friday, RBI said that it is conducting a sale of government securities (GS) worth Rs 10,000 crore, owing to the “current assessment of prevailing and evolving liquidity conditions”. The sale will take place through multi-security auction using the multiple price method — 5.64% GS 2019 with maturity date of January 2, 2019, 8.12% GS 2020 (December 10, 2020), 8.15% GS 2022 (June 11, 2022), 7.35% GS 2024 (June 22, 2024) and 8.33% GS 2026 (July 9, 2026).

“There is an overall aggregate ceiling of Rs 10,000 crore for all the securities in the basket put together,” said the circular.

Experts suggest that this decision would have been taken in wake of increase in the liquidity owing to less credit outflow from the banks and increase in the forex reserves. “This measure is taken to balance the economy. There is a need for liquidity management in the country to stabilise the interest rates. As it is there is less off take of the credit from the banking system. With less demand for the credit from the banking system, banks are flushed with resources. In such scenario, when there is liquidity infusion because of forex reserves, it is pertinent that the apex bank does liquidity management and sucks of resources,” Charan Singh, former Research Director at RBI told DH.

He also sees this move to stabilise call money market and the short-term money market.

The foreign exchange reserves, for the week ended June 30, stood at Rs 25.02 lakh crore, up Rs 33,580 crore from the week ended June 23. The gold reserves showed the maximum jump of 1.56%, followed by Foreign Currency Assets (1.35%) and SDR (1.16%).

The increase in the foreign exchange levels comes amid the escalating border tension with China.

The move to suck out liquidity comes at the time when currency available with the public is Rs 14.5 lakh crore, just 85.22% of the pre-demonetisation level, as per the latest data available with RBI. There has also been a growing pressure on RBI to reduce the interest rates.

Experts that DH spoke to suggest a further increase in the liquidity levels, owing to a better tax collection arising out of Goods and Services Tax (GST) roll out.