The Reserve Bank of India (RBI) conducted the first phase of its ₹60,000 crore liquidity infusion program on Thursday by purchasing government securities (G-Secs) worth ₹20,000 crore through Open Market Operations (OMO). The move is aimed at easing the liquidity deficit that reached multi-year highs in the banking system last week.
The auction witnessed significant participation from state-owned and private banks, who saw the OMO as an opportunity to offload old bonds at a profit, according to G-Sec traders.
Bond Purchases and Market Impact
The RBI purchased bonds with maturities between 2033 and 2037, with cut-off prices ranging from ₹100.80 to ₹102.72. The largest transaction was a ₹6,520 crore purchase of 7.18% 2037 bonds at ₹102.72 (yielding 6.85%).
Due to a delay in publishing auction results, government securities market hours were extended till 5:30 PM, beyond the usual 5 PM closing. Traders reported that many booked significant profits by selling bonds from their held-to-maturity (HTM) portfolios.
“The RBI’s decision to target 10-year and old 14-year papers was strategic,” noted the head of treasury at a state-owned bank. “These bonds are part of HTM, available-for-sale (AFS), and fair value through profit and loss books, making them attractive for banks to offload.”
The cut-off yield for the current 10-year benchmark bond (6.79% 2034) remained consistent with the secondary market, indicating that the RBI does not intend to distort yield levels. However, cut-off prices for other papers were lower than last traded prices, signaling substantial profit booking during the auction.
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Liquidity Measures and Upcoming Auctions
The RBI’s liquidity package includes three OMO auctions, with the next ones scheduled for February 13 and February 20. Additionally, the central bank announced a $5 billion forex swap, a 56-day variable rate repo (VRR), and daily VRR auctions to stabilize liquidity.
On Thursday, banks borrowed ₹1.17 lakh crore at a 6.51% cut-off rate, against a notified amount of ₹1.50 lakh crore. Interbank traders noted minimal fund demand due to government month-end spending and limited outflows.
These measures are expected to alleviate liquidity pressures and ensure smooth functioning of the money and bond markets. The central bank’s strategy underscores its focus on maintaining financial stability while addressing short-term funding challenges in the banking sector.
