RBI to buy G-Secs worth Rs 10,000 cr under open market operations

The government securities market may see a mild rally on Wednesday as the Reserve Bank of India has announced that it will buy four medium to long-tenor securities which are available in the investment portfolios of most banks.

The four government securities that will be purchased by the RBI from banks on November 24 under ‘open market operations' are: GS 2017 (maturing in 2017 and carrying a coupon rate of 7.99 per cent), 7.83 per cent GS 2018, 7.80 per cent GS 2021, and 8.13 per cent GS 2022.

OMO is aimed at infusing liquidity into banks so that they are in a position to subscribe to primary issuances of government securities. Besides, it will also send a signal to market players on the yield (return on investment) that the central bank is comfortable with.

The RBI will purchase the four securities through an auction for an aggregate amount of up to Rs 10,000 crore, according to a central bank statement issued on Tuesday.

Liquidity pressure has been building up in the banking system since the second week of November as inflows on account of foreign institutional investors have dried up. These investors are cutting their investment portfolios in emerging markets, including India, and investing in safe-haven US Treasury Bills in view of the Euro zone debt crisis and the global economic downturn. Moreover, with credit pick-up in the second half so far being relatively better than what it was in the first half, liquidity tightness is emerging, said a banker.

The liquidity tightness in the banking system is underscored by the fact that on Tuesday 50 banks collectively borrowed one-day money aggregating Rs 1,31,540 crore from the RBI.

“The choice of securities for the OMO is right as these securities are available in banks' ‘available for sale' and ‘held for trading' portfolios. If the RBI gives yield indication in the auction which is either in line or slightly less than the prevailing market trend then there could be a rally in government securities,” said Mr N.S. Venkatesh, Chief General Manager, IDBI Bank.

Mr Venkatesh expects the yield on government securities, especially the four which can be offered by banks in OMO, to soften by 5 to 7 basis points on Wednesday. A bond's price and its yield are inversely related. One per cent change is equal to 100 basis points.

Market players are expecting the RBI to conduct more OMOs in the next few months so that banks have the headroom to subscribe to fresh government borrowing. In late-September, the Government announced that it will be borrowing Rs 53,000 crore more in the current financial. Overall, the Government will be borrowing Rs 4.70 lakh crore in FY2012.

kram@thehindu.co.in