RBI to sell bonds for Rs 10,000 crore next week to suck liquidity

MUMBAI: The Reserve bank of India has said it would sell bonds worth Rs 10,000 crore in open market operations to suck out liquidity which is pulling market rates below the policy rates.

Such move can help restore the daily overnight call rate upto the level of repo or the rate at which banks borrow short term money from the central bank. The inter-bank call rate, at which banks borrow and lend each other overnight has been hovering around 7.10-7.15% range versus 7.25%, the repo rate now.

This also suggests RBI’s discomfort over fast dipping short-term borrowing rates even ahead of the the policy rate curve, which in turn, could prompt volatility in the interest rate market.

“OMO sale is purely to sterilise excess liquidity, a part of liquidity framework,” said Soumyajit Niyogi, interest rate strategist, SBI DFHI. “While additional supply expected to push up bond yield further, but short end (3year paper) paper may attract commercial banks for LCR (liquidity coverage ratio) requirements.”

During the week the system was liquidity surplus in the wide range of about Rs 11,000-50,000 crore while two months ago, liquidity was deficit by about Rs 60,000-70,000 crore.

The auction will be conducted on July 14, 2015. Four government securities with maturities ranged between three and 20 years will be up for sale. “There is an overall aggregate ceiling of Rs 10,000 for all the securities in the basket put together. There is no security-wise notified amount,” RBI said in a release.

The LCR is designed to address short-term liquidity risk by ensuring that banks hold sufficient cash and other liquid assets to meet obligations in a 30-day market stress scenario.