The RBI's idea is to help the government contain borrowing costs for remainder of the fiscal year
The Reserve Bank of India (RBI), on September 24, rejected all bids for its Rs10,000 crore Open Market Operation (OMO) even as it received more than six times worth bids for the auction.
To be specific, the central bank received bids worth Rs 66,473 crore for the auction against the notified amount of Rs 10,000 crore. Simultaneously, the central bank announced another round of ‘Operation Twist’, or simultaneous sale and purchase of papers, on October 1.
What really happened?
RBI conducts outright purchase of bonds from banks, to inject liquidity in the banking system. Through an outright purchase, in this case, the central bank wanted to infuse liquidity into banks. But, it was not willing to purchase bonds at a yield sought by the participants at the auction.
Market players sought a yield for the papers at the auction that was higher than what the central bank would have preferred.
The yield at which the auction takes place would have signaled to the market that the RBI is comfortable at that level, which the central bank possibly didn’t want. The reason is simple: The central bank wants to probably help the government contain the borrowing costs low. Acceptance of bonds at a higher yield would have signaled that the government will have to borrow at a higher cost.
What do dealers say?
“The RBI thinks that the yield asked for by market was higher than what RBI would have liked; on the other hand, the market is saying that with no rate cut and large scale OMO, the rates should have been higher as inflation and government borrowing concerns remain,” said Harihar Krishnamoorthy, treasury head, First Rand Bank.
Markets were obviously disappointed with RBI’s response at the OMO. “There is an oversupply of papers in the market and the market was expecting RBI to buy at least some of the notified amount. The rejection outright has come as a bit surprising,” said one of the bond dealers with a state-run bank.
The second half borrowing calendar of the government is expected next week, which will show the exact quantum of government borrowing. The government has a massive Rs 12 lakh crore borrowing planned for this fiscal of which more than half is already borrowed.There is a sense in the market that in the second half borrowing calendar, the government could further tweak the borrowing plan given the muted tax collections and need for higher spending in the economy. A higher borrowing could push up yields further high. The RBI, hence, wanted to keep the yields low to prepare for such an eventuality.