Mumbai: The Reserve Bank of India (RBI) has no plans as of now to buy government bonds from the secondary market to support the market or to ease tight liquidity condition given its anti-inflation stance, two central bank officials with direct knowledge told Reuters.
Some market participants are expecting the Reserve Bank of India to conduct open market operations (OMO) by June to ease the expected liquidity stress due to advance tax outflows.
“There is a large redemption in July and this is only a temporary tightness. We would have done an OMO if liquidity tightness would have been beyond the plus/minus 1% (of deposits) comfort zone for a sustained period,” said one official.
Advance tax payments are due by 15 June and dealers expect the liquidity in the banking system to turn into deficit of Rs1 trillion, much above the RBI’s comfort zone of Rs50,000 crore shortfall. But around Rs37,000 crore of 9.39% 2011 bond will mature on 2 July.
“The main task now is to bring down inflation,” said the second central bank official.
Buying government bonds from the open market will infuse liquidity and stoke inflation further, much against the central bank’s stance.
RBI governor Duvvuri Subbarao also told participants at a meeting with state finance secretaries earlier this week, that there is no plan to conduct an OMO now, two sources who attended the meeting, told Reuters.
Subbarao said this whilst explaining why the pressure of raising money from the market was more stiff this year than last year’s, one source said.
He said facilities such as liquidity adjustment facility should be able to tide over a temporary cash crunch, said another source who attended the meeting.
When contacted, RBI spokeswoman Alpana Killawala said, providing context to Subbarao’s comments, “We have been maintaining that we have a number of instruments and we will use them as and when warranted.”
Subbarao also acknowledged at the meeting that government bond yields are at high levels and added that inflation and high level of borrowing by the state and central governments were the other reasons why market borrowing was more difficult this fiscal, officials said.
Dousing bond market expectations that the RBI being the debt manager to the government may buy bonds to prevent any sharp rise in yields, the central bank officials said rising yields correctly reflect the underlying inflation pressures and the RBI’s stance.
On Thursday, the 10-year benchmark 7.80% 2021 bond yield rose to its highest level of 8.40% since it was first issued on 8 April on inflation concerns.