RBI may pause OMO purchases, turn to VRR auctions for liquidity management

Reserve Bank of India

The Reserve Bank of India (RBI) is unlikely to announce additional Open Market Operation (OMO) purchases of government securities this month and may instead rely more heavily on variable rate repo (VRR) auctions to manage liquidity in the banking system, market participants have said.

The view comes as the central bank has been actively conducting VRR auctions in recent days to modulate liquidity conditions. Experts noted that the second tranche of OMO purchases scheduled for December 18, coupled with ongoing VRR operations, is expected to help cushion the system ahead of heavy goods and services tax (GST) outflows on December 20.

Liquidity pressures are also expected to ease thereafter, as government spending on salaries and pensions kicks in next week. As a result, experts believe additional OMO support may not be necessary, with VRR operations likely sufficient to address interim liquidity needs.

Currently, the liquidity in the banking system stood at Rs 68,586.12 crore deficit. The second tranche of OMO purchases by the RBI is expected to improve liquidity conditions in the banking system.

"OMOs are inherently durable liquidity operations. With systemic liquidity slipping into deficit largely transitional in nature. RBI is likely to rely more on VRR operations to manage short term liquidity mismatches. VRRs offer flexibility without committing durable liquidity, allowing the central bank to fine tune conditions while preserving policy optionality," said V Ramachandra Reddy, Deputy General Manager and Head of Treasury at The Karur Vysya Bank.

The central bank in this month has provided durable liquidity of Rs 1.50 lakh crore through OMO purchases and USD/INR Buy/Sell swap auctions.

Additionally, through VRR auctions, the central bank injected liquidity worth Rs 2.60 lakh crore.

The RBI conducted 5 VRR auctions since December 15, with tenures ranging between overnight and 11 days.

Since majority of the auctions were taken place during the time when liquidity was in surplus, hence the full subscription of amount was not seen.

Experts are of the view that the central bank may announce may VRR auctions in coming days.

Money market experts said that there is a high probability that the central bank may keep the OMO purchases announcement for the fourth quarter of current fiscal.

This is because, the liquidity in the fourth quarter gets tighter due to various reasons such as advance tax outflows, GST tax outflows, higher credit growth, high government securities, state development loans and corporate bonds issuances, and some pressure from the withdrawal in mutual funds.

"OMOs are likely to be deployed during the tightest liquidity phase of the financial year (January to March) when systemic liquidity typically comes under pressure. During this period, liquidity support is expected to offset statutory quarterly outflows, including GST and advance tax payments, alongside a seasonal pick-up in credit demand," said Mataprasad Pandey, vice-president at Arete Capital Service.

However, liquidity is expected to get some cushion due to inflows on account of bond maturity on January 11, 2026, worth Rs 90,785.996 crore.