Central bank announces measures to boost liquidity

Reserve bank of India on Monday announced another bazooka of liquidity measures to allay the fears of the market over rising yields and higher borrowing program. The central bank increased the held to maturity limit (HTM) or the amount that banks invest in government securities from 19.5% to 22%. It also announced additional open market operations worth ₹20,000 crore and term repo operations worth ₹1 trillion to infuse liquidity into the market.

In order to reduce the cost of funds for banks, RBI also allowed them to swap the funds raised under long term repo operations (LTRO) at 5.15% with new the funds made available under the ₹1 trillion repo window at 4%.

In its press release, RBI said that market sentiment has been impacted by concerns relating to the inflation outlook and the fiscal situation amidst global developments that have firmed up yields abroad.

“RBI stands ready to conduct market operations as required through a variety of instruments so as to ensure orderly market functioning,” it assured.

The central bank also assured that RBI remains committed to use all instruments at its command to revive the economy by maintaining congenial financial conditions, mitigate the impact of covid-19and restore the economy to a path of sustainable growth while preserving macroeconomic and financial stability. It also assured that the government borrowing programme of the Centre and States for the year 2020-21 will be completed in a non-disruptive manner.

The liquidity measures come at a time when the auction of the 10 year government securities (G-sec) to raise ₹18,000 crore devolved almost fully. This was the second consecutive time this month when the 10-year paper failed to receive any interest from buyers, forcing the primary dealers to absorb the quantum.

Over the last four weeks, yields have risen by 36 basis points over worries that retail inflation could cross 7% in three months, even as economic recovery lags.

The Monetary policy committee (MPC) in its statement on 6 August said that headline inflation may remain elevated in the second quarter, however it would moderate in the second half. It also noted that that food and fuel prices are stabilising and cost push factors are moderating. The recent appreciation of the rupee is also likely to have an impact on imported inflationary pressures. Taking all this into account the MPC decided to pause and remain watchful and use the available space judiciously to support the revival of the economy.