Views | RBI steps in to ease liquidity crunch

Views | RBI steps in to ease liquidity crunch

The Reserve Bank of India has finally announced its first programme in this fiscal year to buy government bonds in what are known as open market operations. The central bank will thus release liquidity into the money market, a move that many traders were clamouring for.

The tight liquidity situation is the main reason why the Indian central bank has announced it would buy government bonds. The other major option it has is to buy dollars, a move that would prevent the rupee from falling further as well as inject liquidity into the domestic money market. However, there is not much room for policy action here. India has a very small balance of payments surplus right now; the flow of foreign capital is barely enough to cover the current account deficit. In the April-June quarter, India had a balance of payments surplus of only $5.4 billion.

The bond market continues to be nervous. The open market operations will put them at ease for now, but it is increasingly likely that liquidity management will be a major challenge in the months ahead.

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