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RBI Takes Steps To Ensure Adequate Liquidity
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He also said there was not much room for aggressive interest rate cuts because of high commodity prices and sticky inflation, and that restrictions on speculative trading in foreign exchange market would stay in place for now.
The 10-year benchmark bond yield fell to a nine-month low of 8.10 per cent on Wednesday when some of the bonds that the RBI offered to buy were the same securities that the government had sold the previous week.
This raised suspicions that the central bank was trying to help the government in its borrowing by creating demand for particular securities, thereby pushing down yields.
"The choice of securities is having a significant influence on the yield curve and selecting such securities to buy that are simultaneously being issued by the government tantamounts to private placement," said a foreign bank dealer.
The RBI plans to buy Rs 10000 crore of government debt on Friday through an open market operation (OMO). It will buy 8.24 per cent 2018 bonds, 8.20 per cent 2022 bonds, 9.15 per cent 2024 bonds and 8.28 per cent 2032 bonds.
The 2024 bond was sold the previous week.
CRR Vs OMO
"Choice of securities and the intent to do OMOs are separate," Gokarn said on the sidelines of an HSBC investor conference on Friday.
"Aggregate objective to do OMO is to put in a certain amount of liquidity into the market," he said.
"The choice of securities is driven by the need to be reasonably certain about achieving the aggregate number. So these are two separate decisions. Reality of the situation is OMO is driven by liquidity shortage, not by government borrowing."
Some bond dealers say a better way to infuse liquidity into the system is to cut the cash reserve ratio (CRR), the proportion of deposits that banks must park at the central bank.
"OMO is a quick short-term, easily implementable liquidity instrument," he said. "The CRR has monetary implication. We cannot use it in the same tactical way that we use OMOs because with every CRR action there is a communication challenge in terms of what it means for the monetary stance," he said.
"(A CRR cut) is something that is best done in the cycle of policies and that is the way we have been looking at it."
The RBI cut the CRR by 50 basis points to 5.5 per cent on January 24 but kept its key policy rate unchanged.
Separately, Gokarn said there was little room for aggressive cuts in interest rates right now, compared with 2008.
"... The perception that that sort of room for very aggressive and very rapid rate cut simply does not exist in today's situation ... the behaviour of commodity prices is and remains a risk to our inflation and growth outlook," he told CNBC-TV18.
Gokarn also said restrictions on speculative trading in foreign exchange would remain in place for now despite the recent rise in the value of the rupee against the dollar and higher capital inflows.
"Let's wait and watch and see how the situation stabilises. There are still risks out there which may not be out of the system and we will take the judgment based on overall sense of stability and return to normalcy," he said.
At 1:04 pm, the yield on the most liquid 2021 bond was down 3 basis points at 8.10 per cent. The rupee, which hit an all-time low of 54.30 per dollar on December 15, was trading around 48.95 to the dollar.