Unlisted gilt auction to sap liquidity, say dealers

Unperturbed by the gilt auction announced on Tuesday, money market dealers said the move by the Reserve Bank of India (RBI) is simply aimed at containing the money supply in the banking system.

The move will complement its liquidity management and any more measures are seen unlikely, dealers said Wednesday.

"Here, I believe there is nothing much to read beyond absorbing the liquidity," dealer of a private sector bank said.

On Tuesday, the RBI said it will auction Rs 6,000 crore of the 11.90 per cent 2007 bond under the market stabilisation scheme (MSS) on Thursday.

The auction-not listed in the Rs 32,500 crore MSS borrowings calendar for the July-September quarter-is being held considering "all the relevant factors", the RBI said, implying that high liquidity triggered the unscheduled tender.

According to dealers, persistent acquisition of foreign exchange by the central bank has boosted interbank liquidity.

Between July 22 and August 12, RBI's foreign currency assets kitty rose by $7 billion, boosting rupee liquidity by over Rs 30,000 crore. This was in addition to Rs 17,800 crore of flows from coupon and gilt maturity.

On the other hand, outflows in this period totalled only Rs 23,000 crore for T-bill and gilt auctions.

Dealers said that while expectations of some coincided with the RBI's announcement, some others were expecting bond offer in early September when over Rs 23,000 crore will be added to banks' surpluses from maturity of the 6.15 per cent 2005 gilt.

"It's a rather no surprise. I think what the market was debating was the timing-now or in first week of September," a senior dealer with a primary dealership firm said.

Dealers said any further liquidity soaking measure from the central bank is unlikely.

Some pointed out that some money from the system would get soaked by the Rs 8,000 crore market borrowing of the government scheduled for September 2-10.

"I think, a view can be taken after the September auction because then the tax outflow will drain some money with banks," a dealer with a state-owned bank said.

He was suggesting that liquidity will get drained in the first fortnight of September because companies will have to pay second instalment of their advance taxes for 2005-06 (April-March).