The Reserve Bank of India (RBI) will conduct open market operations (OMO) purchase of government securities worth Rs 10,000 crore on Tuesday.
The central bank will be conducting auctions to purchase five government securities (G-sec) — 7.28% G-sec 2019, 7.16% G-sec 2023, 7.72% G-sec 2025, 8.26% G-sec 2027, and 9.20% G-sec 2030.
OMO purchases are undertaken to ease liquidity in the system while OMO sales are done to remove excess liquidity.
The RBI has been conducting OMO purchases in a significant manner since the last few months, especially in March, when the system was witnessing considerable crunch in liquidity.
However, in recent times, liquidity conditions seem to have eased, which is evident from the fact that call money rates have remained low. The call rate last week fell to almost three-year low of 6.337%.
The call rate is the rate at which banks lend overnight money to each other, and any surge in this rate is a reflection of a possible lack of liquidity in the system.
It is noteworthy that in the April monetary policy, the central bank had introduced a slew of measures to ease liquidity in the system.
The RBI said it would progressively lower the average ex-ante liquidity deficit in the system to a position closer to neutrality. The regulator has been keeping the liquidity shortfall equivalent to 1% of banks’ net demand and time liabilities (NDTL).
A move towards a position closer to neutrality will lead to the release of about Rs 90,000 crore into the system over a period of time.
“The period over which we move depends to some extent on market conditions, depends on the flows that come in.
Remember net foreign assets is part of the liquidity move. So we have to work it out. We have to see how this move takes place. An addition of one percent deficit to about neutral means an additional removal of deficit by about Rs 80-90,000 crore,” governor Raghuram Rajan had said.
On Monday, the 10-year benchmark yield closed at 7.42%.
