The Reserve Bank of India could sell around Rs 500 billion ($6.01 billion) of government bonds to narrow banking system liquidity, with the supply front-loaded in this quarter, eight treasury officials said.
“Since the operation is being targeted to remove liquidity, the cap should be around 500 billion rupees,” said Abhishek Upadhyay, a senior economist at ICICI Securities Primary Dealership.
“Ideally bond sales should be conducted within the next two months, if not sooner, as liquidity will dry up with pickup in currency in circulation during peak festive season.”
The Reserve Bank of India (RBI) Governor Shaktikanta Das on Friday said the central bank may have to consider open market operations (OMO) to manage liquidity in line with the stance of monetary policy.
The RBI has been selling debt on the bond trading platform in the five weeks to September-end. India’s banking system liquidity – the amount of funds in the interbank system – slipped into a deficit in the middle of September.
Liquidity moved back to surplus this week and government spending should bolster it going ahead. While keeping interest rates unchanged on Friday, the RBI signalled it would keep rates high and liquidity tight to bring inflation closer to its 4% target.
The policy announcements led to a sharp selloff in bonds, with the benchmark yield hitting a seven-month high of 7.40% on Monday. The RBI has not sold bonds via auctions since November 2017.
In the weeks ahead, festive demand for cash and RBI’s dollar sales will contain the cash surplus, lowering the need for OMOs, traders said. Banking liquidity will swing between a deficit of 250 billion rupees to a surplus of 500 billion rupees in the coming months, Swati Arora, a senior economist with HDFC Bank, said.
“As liquidity is likely to remain tight in October-March, the quantum of OMOs could be small,” she said. RBI Governor Das has said OMOs are aimed at managing liquidity but market participants are not convinced.
The central bank may auction a higher proportion of long maturity bonds to steepen the yield curve which is flat now, traders said.
