The Reserve Bank of India (RBI) began its planned liquidity infusion on Thursday by purchasing government bonds worth Rs 20,000 crore. This marks the first step of the open market operations (OMO) announced earlier this week to ease liquidity conditions in the banking system.
The auction, which saw significant participation from both state-owned and private banks, was seen as a favorable opportunity for selling older government bonds, particularly 10-year and 14-year bonds. These bonds were part of banks’ held-to-maturity (HTM) book, allowing banks to sell them at a profit.
The RBI acquired bonds with various maturities, ranging from 2033 to 2037. The cut-off prices for the bonds ranged from Rs 100.80 to Rs 102.72. The highest purchase was Rs 6,520 crore of 7.18% bonds maturing in 2037, bought at a price of Rs 102.72, reflecting a yield of 6.85%. The government securities market hours were extended until 5:30 PM on Thursday due to a delay in announcing the results of the auction, as the market typically closes at 5 PM.
According to traders, the auction provided a profitable opportunity for banks to offload bonds from their HTM portfolios. “Traders booked good profits today as it was the only option to sell these bonds, or else they would have had to hold them until maturity,” said a trader from a private bank.
The cut-off prices for the 10-year benchmark bonds, such as the 6.79% 2034 bond, aligned closely with the last traded prices and yields in the secondary market. This indicates that the RBI aimed to avoid disrupting the yield levels of the current 10-year benchmark bonds. However, the prices of other bonds purchased were significantly lower than their last traded prices, signaling that banks were taking advantage of the opportunity to book profits.
The RBI’s decision to focus on the 10-year and 14-year bonds was strategic, as these bonds are part of both the available-for-sale (AFS) and held-to-maturity (HTM) categories in banks’ books. “The strong response would not have been possible without including these bonds. This was crucial to achieving the RBI’s goal of easing liquidity conditions,” explained the head of treasury at a state-owned bank.
This move comes in response to a growing liquidity deficit in the banking system, which reached multi-year highs last week. To address this, the RBI announced a series of measures on Monday, including three OMOs totaling Rs 60,000 crore. The remaining two OMOs are scheduled for February 13 and 20.
In addition to the OMOs, the RBI also announced a buy/sell swap of $5 billion and a 56-day variable rate repo operation. To further manage liquidity, the central bank had previously decided to conduct daily variable rate repo (VRR) auctions.
On Thursday, banks borrowed Rs 1.17 lakh crore from the RBI, less than the Rs 1.50 lakh crore available under the repo operation, at a cut-off rate of 6.51%.
Traders in the interbank call money market noted that the demand for funds remained relatively low, due in part to the absence of major outflows from the banking system and support from the government’s month-end spending.
