Forty eight hours ahead of the 50 basis points cash reserve ratio (CRR) cut, the Reserve Bank of India will conduct a price-based auction (reissue) of 10.47 per cent 2015 government paper worth Rs 4,000 crore. The auction will be conducted on May 17. The CRR cut -- which will release Rs 4500 crore into the system-- will take effect on May 19.
In effect, the auction outflow will be neutralised by the liquidity released through the CRR cut.
The decision of the auction, however, was in line with the market expectations. Dealers expected the central bank to announce the auction as the ways and means advances figure rose to Rs 9,109 crore (close to the upper limit of Rs 10,000 crore) on May 5 and said the cut in the CRR was just to make space for it.
Dealers expectation was reflected in the movement of government security prices, which moved up by only 25-30 paise over the last two days across all the maturities despite the Reserve Bank of India's (RBI) decision on the reduction of the CRR.
The RBI, since the beginning of the fiscal, has been conducting auctions aggressively. The auction of 10.47 per cent 2015 paper will complete 38.61 per cent of the targeted gross government borrowing programme of 1,19,770 crore.
