RBI operations in the past week
by
Mentors4ias
·
December 5, 2015
Open Market Operations by RBI
- Open Market Operations are market operations conducted by RBI by sale or purchase of government securities in order to adjust the liquidity conditions in the market.
- The Reserve Bank of India will infuse Rs 10,000 crore to ease a liquidity crunch in the money markets by buying government securities, and later hold a repo auction for Rs 25,000 crore .
- These operations are being conducted based on the current assessment of prevailing and evolving liquidity conditions, according to the central bank.
- Festival related demand for cash in addition to slower government spending has tightened liquidity in the money market during the last two months.
- The tight liquidity has pushed up overnight rates above 7 per cent on some occasions. The central bank targets the call money rate to hover around the policy rate which is 6.75 per cent.
RBI strategy to counter fed tapering
- Haunted by memories of India’s 2013 markets crash, the country’s central bank is engaging in a tricky balancing act with domestic yields to keep volatility out of its bond markets ahead of the Federal Reserve’s historic policy decision this month.
- The Reserve Bank of India (RBI) is seeking to prevent wild swings in bond markets by agreeing to pay higher interest rates to investors at bond auctions while also buying bonds in the open market to stop yields rising too much.
- Although India has outperformed many emerging markets this year, the country has not been immune to Fed jitters, with foreign investors selling around $1.7 billion in bonds and shares last month.
- The RBI has in its past two weekly government bond auctions allotted tenders to bidders below market prices, effectively paying higher-than-normal yields.
- Typically, the RBI sets a maximum cut-off yield for bids and employs a process known as ‘devolvement’ for weak bond tenders in which the auction’s underwriting dealers buy up the shortfall in undersubscribed tenders at the cut-off yield.
- This is why the RBI has avoided devolvement at its Nov. 27 and 20 auctions, despite tepid appetite, and has chosen to accept all bids, even those demanding yields above the majority of the bidders.
- The RBI’s last devolved auction took place in June when demanded yields rose to rates that were uncomfortably high for the central bank.
- Last Friday, the RBI sold 150 billion rupees of bonds, almost half of which were 10-year benchmark bonds priced at a 7.76 percent yield, 4-5 basis points higher than market rates on that day.
- A surprise RBI announcement on Wednesday to buy $1.5 billion of government bonds in the secondary market, however, is targeted at countering the recent rise in yields and easing tight cash conditions. The move helped push yields down six basis points on Thursday.
- And as a result, yields at this week’s RBI bond auction on Friday are also likely to be lower.
- However, analysts say the RBI’s current strategy comes with hazards and may perversely create more problems.
RBI intervenes as rupee slipped
- The Reserve Bank of India (RBI) intervened in the foreign exchange market as the rupee weakened to a more than two-year-low of 67 a dollar. The intervention helped the currency to eventually recover ground.
- Signs that the U.S. Fed is on course to increase interest rates this month have spurred investors to move out of emerging market economies and to safer assets.
- The European Central Bank’s decision to cut interest rate also weighed on the currency.
- The ECB reduced its deposit rate into negative territory to boost the European economy and also said it will continue to buy government bonds and other assets until March 2017, six months longer than planned.
