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RBI also increased the held-to-maturity limit of banks to 22% from 19.5% of net demand and time liabilities (MINT_PRINT)
RBI also increased the held-to-maturity limit of banks to 22% from 19.5% of net demand and time liabilities (MINT_PRINT)

RBI moves to keep a check on yields

  • The central bank has also doubled the size of its liquidity infusion into the market through purchase of government securities to 20,000 crore

Reserve Bank of India (RBI) governor Shaktikanta Das on Friday announced a slew of liquidity measures while making it clear that the market should also cooperate in keeping a check on yields with an upcoming massive borrowing programme by the government.

In a first-of-its-kind measure, RBI has decided to purchase state development loans (SDLs) through open market operations (OMOs) to support the borrowing programmes of state governments. The central bank has also doubled the size of its liquidity infusion into the market through purchase of government securities to 20,000 crore.

“To impart liquidity to SDLs and thereby facilitate efficient pricing, it has been decided to conduct OMOs in SDLs as a special case during the current financial year. This would improve secondary market activity and rationalize spreads of SDLs over central government securities of comparable maturities," said Das.

RBI also increased the held-to-maturity limit of banks to 22% from 19.5% of net demand and time liabilities (NDTL). This, along with the inclusion of SDL in OMOs, is expected to ease concerns about illiquidity and also support the borrowing programmes of state governments. Held-to-maturity is a category of debt banks must hold till redemption but which can be reshuffled once a year.

“RBI has reiterated the non-disruptive conduct of the government borrowing programme. To this effect, the OMO amounts have also been increased to 20,000 crore. On-tap targeted long-term repo operations for bonds is a great liquidity booster and would be good for the corporate bond segment. OMOs in SDLs is a fantastic move and can help bring down spreads versus central government bonds," said Lakshmi Iyer, chief investment officer, Kotak Mahindra Asset Management Company.

RBI also rapped the bond market for demanding a higher yield on sovereign papers, which led to the devolvement of recent government auctions. Das said both market participants and RBI should share the responsibility of ensuring the orderly evolution of the yield curve. RBI is ready to conduct market operations to assuage the liquidity pressures, but the bond market should be more cooperative, he said.

“Market participants, on their part, need to take a broader time perspective and display bidding behaviour that reflects a sensitivity to the signals from the RBI in the conduct of monetary policy and debt management," Das said. “We look forward to cooperative solutions for the borrowing programme for the second half of the year. It is said that it takes at least two views to make a market, but these views can be competitive without being combative."

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