The Reserve Bank of India could toy with the idea of open market purchases of goverment securities after the overwhelming success of its maiden buyback of bonds issued under the market stabilisation scheme, analysts said.
The objective of the RBI’s purchases could be to partially infuse inter-bank liquidity, indirectly help manage goverment market borrowing and to augment its securities portfolio to be able to conduct reverse repo auctions.
The open market purchases can be conducted alongsidde the buyback of MSS-papers issued by the goverment, according to the experts.
“After the success in yesterday’s MSS buyback of dated securities, the RBI may think of extending this to purchase of goverment bonds as well”, said Sudhir Joshi, treasurer, HDFC bank. This could help in intrest rate and liquidity management, he said. “From pricing perspective, banks can get a good price which can help them book profits, Joshi added.
The central bank has often said it has all options open for its liquidity management, including open market operations. In fact, in the mid-term annual policy review, RBI Governor, D. Subbarao expanded the stance to include a statement that the RBI will actively manage liquidity to ensure orderly conditions in the financial markets.
“Continue with policy of active demand management of liquidity through appropriate use of all instruments inclluding CRR, open market operations, MSS and LAF to maintain orderly conditions in financial markets”, Subbarao’s statement had said.
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Most bankers expect liquidity infusion by RBI to continue because banks are facing strong demand for credit as international sources of funds for Indian companies have dried up.
Open market operations are seen helping banks with durable liquidity which will be in sync with the central bank’s recent measures that included sharp cuts in cash reserves, policy interest rates and statutory liquidity ratio. The RBI cut repo rate by 50 basis points to 7.50 per cent, cash reserve ratio by 100 bps to 5.50 per cent and statutory liquidity ratio by 100 bps to 24 per cent.
Since there could be limits to cut CRR further, open market operations will augment RBI’s efforts, analysts said.Most banks say more needs to be done on the liquidity front.
This is a busy season of credit. Liquidity is ample now. But liquidity is still a concern in the medium term,” said O P Bhatt, chairman, State Bank of India. “More liquidity may be needed if credit demand goes up in Oct-Apr,” said M D Mallya, chairman and managing director, Bank of Baroda.
While the CRR cut impact on liquidity will mostly be offset by RBI’s dollar sales in the foreign exchange market, the SLR cut will infuse liquidity on a durable basis and also help the RBI to buy bonds from banks, bankers said.