RBI is conducting Rs 12,000 crore OMO purchases in the secondary market

The central bank carried out Rs 12,470 crore worth of open market operations (OMO) purchases in the secondary market in the week ended November 7, the first such move in five months, as it sought to shore up domestic bank liquidity amid rising bond yields. The yield on ten-year benchmark bonds closed at 6.52%, two basis points higher than the previous close, largely due to a mismatch between supply and demand.

“Today’s (Friday) data provides confirmation to the market that the central bank was present last week. It also appears that it made OMO purchases early this week in approximately the same amount as last week,” said a bond trader with a Primary Dealer.However, market participants believe that the central bank’s purchase of liquid bonds in the secondary market will not be able to soften bond yields as the long end of the curve needs support.

“They (RBI) need to give a signal that they are also present at the longer end of the curve. With every auction of long bonds, yields rise by 2 to 3 basis points, which also feeds into 10-year yields,” said another trader at a primary dealer.

During the G-sec auction on Friday, the cut-off yield on the 40-year paper was 7.37%. The previous 40-year auction last month had a cut-off yield of 7.16%, RBI data showed. “We also need to see whether these OMO purchases have been made to replenish the RBI’s portfolio, or to give a signal to the market. From a liquidity perspective, this was not expected as there is still a tranche of CRR cut left this month,” the trader said. Two of the four tranches of the cash reserve ratio (CRR) reduction came into effect on October 4 and November 1, turning the system’s liquidity from deficit to surplus. The next tranche of the CRR cut will come into effect on November 29, bringing the reserve ratio to 3%.

The percentage cut in CRR is expected to release a total of Rs 2.5 lakh crore in the banking system by December.

The liquidity of the banking system stood at a surplus of Rs 2.4 lakh crore on November 13.

The RBI conducted a variable rate reverse repo (VRRR) auction to absorb excess liquidity but saw weak demand as market participants remain cautious about parking funds ahead of the weekend and at a time when credit demand is expected to be robust.

In the first such auction in over a month, participants bid Rs 57,380 crore against a reported amount of Rs 1 lakh crore, data showed.