RBI may continue OMO purchases at current pace till March: Viral Acharya

Reserve Bank of India Deputy Governor Viral Acharya on Wednesday said the pace and quantum of purchases through open-market operations might continue at the current level till March next year.

“The exact calibration will depend on sustained changes in the behaviour of the currency in circulation,” he added.

Over the past two months, the Reserve Bank of India (RBI) has implemented several regulatory actions to improve the liquidity in the banking sector, non-banking financial companies (NBFCs), and housing finance companies (HFCs). As a result, the system-wide liquidity deficit has fallen to its lowest in eight weeks to Rs 75.33 billion for the week ended November 30. The average liquidity deficit stood at over Rs 100 billion in the preceding two weeks, and peaked at Rs 130.36 billion in mid-September, according to CARE Ratings.

After the RBI’s bi-monthly monetary policy meeting on Wednesday, Deputy Governor Viral Acharya said, “The RBI has been watching the market developments closely since the end of August. We have been in regular touch with the Securities and Exchange Board of India (Sebi) to assess the fallout in terms of mutual fund redemptions and the resulting roll-over risks for NBFCs and HFCs.”

He also said, “The RBI is guided by the principle of addressing the system-wide liquidity. It also stands ready to be the lender of last resort, but… [only if] conditions warrant such an extreme measure.”

“In our assessment there is no necessity at the present given the sound health of our economy,” he added. Some measures the RBI announced are higher purchases through open-market operations (OMO), which have touched Rs 1.36 trillion this fiscal year, Acharya said. In the past three months OMO purchases have touched Rs 1 trillion. The central bank recently announced another OMO purchase of Rs 400 billion for December.

Over the past two months, the RBI has also infused liquidity through the term-repo window, in addition to the liquidity-adjustment facility. This was done to let individual banks enhance their liquidity positions.

The total repo borrowings (repo, term repo and MFs) have declined from Rs 137.4 billion in mid-November to Rs 116.82 billion by end-November. The total reverse repo transactions have increased from Rs 54.32 billion in mid-November to Rs 74.33 billion at the end of November. “The moderation in liquidity deficit in the week ended November 30 can be attributed to the cooling of peak festive demand, lower forex intervention by the RBI, with the strengthening of the rupee and the liquidity infusion by the RBI by way of OMO purchases,” said Madan Sabnavis, chief economist, CARE Ratings, in a recent report.

Acharya also said the RBI plans “to conduct long-term repo operations to meet transient liquidity demand that is likely to emerge later this month on account of the third tranche of advance tax outflows.”

For NBFCs and HFCs in particular, last month the RBI relaxed the concentration limits on banks for lending to individual NBFCs and HFCs from 10 per cent to 15 per cent.

Further, “The RBI has taken measures to facilitate asset and risk transfers within the financial system, this can be considered as re-intermediation across financial players of risk. We believe this is healthy for financial stability overall,” Acharya said.

Last month RBI announced two measures to facilitate this re-intermediation. The first, allowing banks to provide partial credit enhancement (PCE) on bonds issued by NBFCs and HFCs will “help credit quality of these bonds and thereby attract mutual funds to provide greater roll-over funding to NBFCs and HFCs,” he said.