Home / News / India /  RBI to conduct OMO for 20,000 crore on 10 Feb

The Reserve Bank of India (RBI) on Monday announced that it will purchase government securities worth 20,000 crore through open market operations (OMOs) in a bid to cap yields of treasury bonds and support an expanded government borrowing programme.

“The Reserve Bank stands committed to ensuring the availability of ample liquidity in the system in order to foster congenial financial conditions," an RBI notification said on Monday. “On a review of current liquidity and financial conditions, therefore, the Reserve Bank has decided to conduct purchase of government securities under open market operations (OMO) for an aggregate amount of 20,000 crore on 10 February 2021."

The central bank will purchase long-term security maturing in 2024, 2028, 2030 and 2034, the notification said.

The bond market had been waiting for the OMO announcement ever since the government announced in the budget its intent to raise 12 trillion for the next financial year and an additional 80,000 crore for this year.

RBI in its monetary policy on Friday, however, did not give any explicit guidance on the same, which disappointed the market. The yield on the 10-year bond on Friday had jumped to 6.17%, the highest in more than five months. However, it cooled off after the OMO announcement with the benchmark 10-year yield closing 3bps lower at 6.04%.

Also on Monday, Bloomberg reported that RBI is expected to buy more than 3 trillion ($41 billion) of sovereign bonds in the next fiscal year to support the government’s borrowing plans, citing a person with knowledge of the matter. This will exceed the 3 trillion the RBI is expected to spend for the current year ending March, the Bloomberg report added.

“The announcement of the OMO by the RBI should be interpreted more as a measure to assuage market sentiment and keep yields stable, given the higher borrowing on the part of the government. The market has been shaky post budget as evidenced by the devolvement in the Friday auctions even though there is surplus liquidity in the system," said Madan Sabnavis, chief economist, CARE Ratings Ltd.

That said, the central bank made several announcements in the policy, aimed at maintaining ample liquidity to support the borrowing programme. This included a gradual rollback of a previous 100 basis point cut in cash reserve ratio—the amount of deposits lenders must set aside as reserves—that was announced amid the pandemic. The CRR normalization opens up space for a variety of market operations to inject additional liquidity, RBI said.

RBI also announced the opening up of the sovereign bond market to retail investors and extended the period of dispensation of higher held-to-maturity limit till 2023. While these measures are aimed at ensuring ample liquidity in the system, it failed to enthuse the bond market, which was expecting RBI for some more clear signals on OMO calendar.

“Overall, we believe supply pressures will have a bearing on the 10-year G-sec yield once RBI starts unwinding its ultra-accommodative monetary policy stance. We expect the yield to settle at 6.2% by March 2021 and rise to 6.5% by March 2022, which would still be lower than the decadal average of 7.7%," said rating agency CRISIL in its report.

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