RBI may go bond shopping ahead of festive season

MUMBAI: The Reserve Bank of India may have to buy more bonds in the next few weeks as the surplus in the system has turned into deficit ahead of the festival season with banks borrowing from the central bank to improve their liquidity position.

As this has the potential to slow the trickle down of RBI's rate cuts, traders expect Rs 50,000 crore of bond purchases by next March.

On October 24, the banking system was running a deficit of Rs 14,900 crore, according to India Ratings citing RBI data. In the preceding five working days, liquidity was either marginally surplus or in deficit mode.

“People are holding cash amid festivities. Along with absence of forex accretion, this is putting pressure on interbank system liquidity,“ said Soumyajit Niyogi, associate director (finance), India Ratings. “RBI may have to come out with more open market operations (OMOs) in due course, as per our estimation Rs 45,000 crore by March. Such a move will help banks to transmit RBI rate cuts faster.“ On Tuesday , RBI conducted Rs 10,000 crore worth of OMOs where it bought back government bonds from the market.

“A shift in interbank liquidity to deficit from surplus led to RBI announcing Rs 10,000 crore worth of OMO purchases to alleviate liquidity crunch,“ India Ratings said.

The central bank has slashed policy rate by 175 basis points cumulatively since January last year. However, lenders have not transmitted this to customers. A comfortable liquidity is seen as a lubricant for faster passing on of rate cut benefits.

Meanwhile, government bond yields moved in a narrow range as investors avoided building major positions. Across maturities, movements were mostly restricted in the one to three basis points range in the past few days.