The Reserve Bank of India (RBI) has decided to infuse Rs 10,000 crore via open market operations (OMOs) on Friday to ease the tight liquidity conditions.
Market participants said the central bank made this decision to ensure adequate demand for fresh supply of government securities that will be auctioned next week.
The RBI said in a release after market hours on Thursday that the measure was consistent with the stance of monetary policy and was based on the current assessment of prevailing and evolving liquidity conditions. The central bank will buy four government securities with no individual purchase limit. These include the current 8.79 per cent 10-year benchmark government bonds maturing in 2021.
The results of the auction will be announced on Friday, whereas the payments for the same will be made on April 3, the day when the government kick-starts the borrowing programme for 2012-13 with the auction of Rs 18,000 crore worth of dated securities.
"This was a surprise as markets were not expecting further OMOs for the rest of the financial year. The central bank is probably foreseeing liquidity pressures to persist in April too," said a senior treasury official from a large public sector bank.
Liquidity deficit stands at three times RBI's comfort level of one per cent of net demand and time liabilities. Today, banks borrowed Rs 1.6 lakh crore from RBI's repo window. On Monday, the repo borrowings were at Rs 1.9 lakh crore. This is despite reduction in cash reserve ratio by 125 basis points since January 2012. The cuts were executed in two tranches with the latest announced early this month.
"The step is also a signal to the market that the central bank is not comfortable with high yields," added the official.
On Wednesday, yields on the 10-year benchmark government bonds had surged to 8.63 per cent after the announcement of higher-than-expected market borrowing programme for 2012-13. On Thursday, bond yields closed at 8.62 per cent as RBI announced the first auction of the borrowing calendar.
Infusion of liquidity through OMOs will help soothe yields. "Yields may settle around 8.5 per cent in reaction to the announcement," said Pawan Bajaj, general manager-treasury, Bank of India.
The government has budgeted Rs 5.69 lakh crore of gross market borrowing for 2012-13, higher than Rs 5.1 lakh crore raised in the current fiscal. RBI purchased more than Rs 1 lakh crore of illiquid securities in the current financial year to offset the impact of heavy government borrowing on yields and liquidity.