MUMBAI: The Reserve Bank of India on Thursday sold ₹50,000 crore worth of government securities through an open market operation (OMO) sale auction as it makes efforts to drain durable liquidity from the banking system.
Market participants said demand was robust despite the cut-off price being higher than expected. This was the first of the three OMO tranches announced last week to suck out ₹1 trillion this month.
Some banks preferred buying bonds at current levels over parking funds through the central bank’s variable rate reverse repo auctions, they said.
“Demand was good, but the levels were higher than expected. We saw some selling initially after the cut-off came in. Then the crude suddenly collapsed, followed by some short covering in the later part of the day,” said a dealer at a primary dealership.
The yield on the benchmark 10-year government bond settled at 7.05 per cent, flat against the previous close.
Net liquidity in the banking system was in a surplus of ₹7.37 trillion on Wednesday, the latest data from the RBI showed, lower than ₹9.85 trillion on Tuesday.
The overnight weighted average call rate (WACR) — which is the operating target of monetary policy — settled at 5.05 per cent, near the Standing Deposit Facility (SDF) rate, against the previous close of 5.02 per cent on Wednesday.
By draining excess liquidity, the central bank aims to align the WACR with the policy repo rate of 5.25 per cent.
“There are many banks that are ready to buy bonds at these levels rather than go for VRRR. The levels are also attractive, that is why the demand came in,” the person quoted above said.
The longer-tenure VRRR auctions met with muted demand, and banks were reluctant to park funds for 30 days.
Market participants said demand at the next two OMO sales will depend on the levels at which government bond yields trade on those days.
The central bank plans to conduct OMO sale auctions worth ₹1 trillion in three tranches in September to absorb surplus liquidity from the banking system, turning to a fresh instrument after its long-term variable rate reverse repo (VRRR) auctions failed to draw adequate demand.
According to RBI data, durable liquidity as of August 31 was ₹10.66 trillion, which is estimated to have increased to ₹14 trillion by the middle of the month. The RBI is expected to conduct more OMO sales in October too to absorb durable liquidity.
Source: Business Standard
