The Reserve Bank of India (RBI) conducted outright open market operation (OMO) sales of government securities worth Rs 11,675 crore in July to drain excess liquidity from the banking system, according to the latest data from the RBI.
The open market operations were screen-based; therefore, no formal auction was conducted to sell the government securities. OMO refers to the purchase or sale of government securities in the open market by the central bank.
The central bank did not conduct any open market operations in June.
The banking system liquidity remained largely in surplus mode during July. The liquidity surplus neared Rs 3 trillion in the first week of August, before moderating to a surplus of Rs 1.78 trillion on Thursday, according to the latest data from the RBI. The liquidity improved following a resumption in spending by the Union and states post-Budget.
Sucking out excess liquidity would mean overnight rates do not fall, as the central bank is maintaining a tight monetary policy with headline inflation ruling above the target, mainly due to elevated food prices.
A report by SBICAPS said, “We believe the RBI will continue to manage liquidity cautiously, as indicated by its multi-year high Variable Rate Reverse Repo (VRRR) auctions in tandem with net OMO sales. At the same time, it recognizes the increased need for higher quality banking system liquidity, epitomized by its recent draft proposal on strengthening the LCR framework, in times of digital banking.”
Along with OMO sales, the RBI has also been conducting VRRR auctions to drain excess liquidity.
Banks parked Rs 14,954 crore against a notified amount of Rs 1 trillion at the 14-day VRRR auction on Friday. At the 3-day VRRR auction, banks parked Rs 45,236 crore against a notified amount of Rs 75,000 crore.
Market participants expect that the RBI will continue conducting OMO sales in small amounts.
“Food inflation is at a higher end; it’s going to be very high for a reasonable period of time. So it is possible that they may suck out liquidity. Until they reach a comfortable level of liquidity, they might conduct OMO sales in small amounts,” said Vinay Pai, head of fixed income at Equirus Capital.
The Monetary Policy Committee revised the inflation forecast on a quarterly basis to Q2 at 4.4 per cent, Q3 at 4.7 per cent, and Q4 at 4.3 per cent, against the previous projections of Q2 at 3.8 per cent, Q3 at 4.6 per cent, and Q4 at 4.5 per cent. The inflation for the first quarter of the next financial year was projected at 4.4 per cent. The domestic rate-setting panel projected inflation at 4.5 per cent for FY25 in the August meeting held last week, the same as the previous projection made in the June meeting.
First Published: Aug 11 2024 | 5:21 PM IST
