The Reserve Bank of India (RBI) has embarked on a liquidity draining exercise. It plans to mop up Rs 3,500 crore from the market through a twin OMO (open market operation) auction tomorrow. The papers to be auctioned are Rs 2,000 crore of 11.98 per cent 2004 and Rs 1,500 crore of 11.90 per cent 2007 paper.
The liquidity overhang was reflected in today's repurchase window at RBI where bids worth Rs 27,850 crore were made and the central bank accepted Rs 25,067 crore at 5.75 per cent. The average daily outflow through the repo window has been over Rs 20,000 crore in the last seven days.
The excess liquidity, though have not moved the government paper yields too much, has driven down the interest in the corporate bond market.
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According to the fixed income dealers, the OMO auction is announced to stop the continuous fall in the corporate paper yields. "RBI is not expected cut the bank rate or even the repo rate too soon as it is comfortable with the present interest rate scenario. It also wants to ensure adequate liquidity in the system. The OMO seems to be the most potent weapon to achieve this," pointed out a banker.
Both 11.98 per cent 2004 and 11.90 per cent 2007 paper are considered to as semi-liquid papers in the government security market. However, the papers are expected to receive good response tomorrow.
Said a dealer with a private sector bank: "Off late attention has been shifting from the liquid papers to the semi-liquid and illiquid papers. Moreover, the amount of auction is also very little as compared to the current market liquidity."
She added that the auction announcement, as it is for a very small amount, has boosted the sentiment of the government paper market and prices may stage rally tomorrow morning.
The 11.98 per cent 2004 paper was being traded around 6.40 per cent today while the yield of 11.90 per cent 2007 paper was being dealt around 6.70 per cent mark. Money market dealers were expecting the cut-off yields in tomorrow's auction will be in line with the market yield.