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RBI to buy bonds to infuse liquidity in cash-starved system

RBI to buy bonds to infuse liquidity in cash-starved system
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First Published: Fri, Oct 22 2010. 12 13 AM IST
Updated: Fri, Oct 22 2010. 12 13 AM IST
Mumbai: The Reserve Bank of India (RBI) on Thursday said it will buyback up to Rs12,000 crore of government securities as part of the government’s cash management operations. Technically known as open market operations or OMO, such bond buying infuses liquidity in the system.
The last such repurchase happened in June when there was a sudden outflow on account of telecom license auctions.
Reflecting the cash tightness in the system, banks have been borrowing in the range of Rs 60,000-80,000 crore daily from RBI over the last one week.
On Thursday, banks borrowed a net Rs 64,935 crore at the repo window.
RBI said it would buy back three stocks totaling Rs 12,000 crore in one or more tranches on Monday.
“The repurchase operations would be purely of ad hoc in nature and will be funded through the current surplus cash balances of the Government of India,” RBI said in a notification.
However, the securities in offer will all mature in a short-time, in December this year, raising apprehensions among the bond dealers about the success of this repurchase programme.
“The announcement came a day before the next auction so it should improve sentiments a bit. But it all depends on whether banks would like to part with their securities that are going to mature shortly,” said G.A. Tadas, managing director of IDBI Gilts Ltd, a primary dealer that buys and sells government bonds. RBI is set to raise Rs11,000 crore from market on Friday through three papers of different maturities.
In June, the OMO was not a success as as the securities sought for repurchase were due to mature shortly.
Tadas said the repurchase of bonds by the RBI will aid in liquidity to some extent and is a positive for the bond market.
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First Published: Fri, Oct 22 2010. 12 13 AM IST