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RBI also rapped the bond market for demanding a higher return on sovereign papers which led to the devolvement of recent government auctions (Aniruddha Chowdhury/Mint)
RBI also rapped the bond market for demanding a higher return on sovereign papers which led to the devolvement of recent government auctions (Aniruddha Chowdhury/Mint)

RBI to purchase state government bonds through OMO

  • The central bank also increased the held-to-maturity limit of banks to 22% from 19.5% of net demand and time liabilities

Reserve bank of India governor Shaktikanta Das on Friday announced a slew of liquidity measures, including the purchase of state development bonds for the first time ever through open market operations. Additionally, RBI also increased the quantum of liquidity infusion into the market through purchase of government securities to Rs20,000 crore.

“In order to impart liquidity to SDLs (state development loans) and thereby facilitate efficient pricing, it has been decided to conduct open market operations (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.

The central bank 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 SLD in OMO, is expected to ease concerns about illiquidity and also support the state government borrowing programme.

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

“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," he 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," he added.

RBI had declined to accept bids at government bond auctions for four consecutive times as it fought to cool benchmark yields, which have crossed 6%. While the government has assured that it will stick to the borrowing programme, the bond market is expecting additional borrowing in the fourth quarter.

Separately, the state governments are also expected to borrow as much as Rs2 trillion in Q3FY21, 33% higher than the actual amount of Rs1.5 trillion last year. This could result in increased SLD issuances in the fourth quarter as they scrabble for funds amid sharp contraction in their own tax collections and shortfall in GST compensation cess at Rs2.35 trillion.

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