The Reserve Bank of India (RBI) has announced yet another round of Open Market Operations (OMO) or simultaneous purchase and sale of gilts on March 4. Under this, the RBI will buy Rs 15,000 crore worth bonds in four different papers and sell Rs 150,000 crore worth bonds in two different securities.
“On a review of current liquidity and financial conditions, the Reserve Bank has decided to conduct simultaneous purchase and sale of Government securities under OMO for an aggregate amount of Rs15,000 crore each on March 4, 2021,” the RBI said on February 24.
The Reserve Bank will continue to monitor evolving liquidity and market conditions and take measures as appropriate to ensure orderly functioning of financial markets, it said.
OMOs refer to sale or purchase of government securities by the RBI. The central bank which also manages the government’s debt management wants to keep the bond yield lower at around 6 percent. On February 24, RBI Governor Shaktikanta Das said the central bank's intent is to not just lower borrowing costs of the government but also for corporates.
The bond market, worried over higher supply of papers in the market in the context of Rs 12 lakh crore borrowing programme of the government, is insisting on higher yields. The RBI has assured ample liquidity in the financial markets. But the assurances have not been entirely convincing to the markets. This is because the central bank has already signalled a gradual return to normal liquidity scenario by stating that the Cash Reserve Ratio (CRR) will be reverted to the 4 percent- level in two tranches.
This sent a clear signal to the markets that the RBI has begun the process of unwinding liquidity measures announced in the wake of COVID. In total, the central bank announced liquidity measures worth over Rs 12 lakh crore to support the financial system since the start of COVID.
The 10-year G-Sec (Govt Securities) yield, which was below 6 percent, prior to the Budget announcement, has jumped 10-15 basis points since then. The 10-year government yield is now seen at 6.18 percent, compared with yesterday’s close of 6.22 percent. Just before the Budget, the 10-year yield was 5.906 percent. From that point, yields have jumped to 6.18-6.23 now.
The RBI has been aggressive with the Open Market Operations (OMOs). On February 8, it announced plans to purchase government securities for Rs 20,000 crore two days later, as it looked to calm the bond market. Later, the RBI announced OMOs worth Rs 10,000 crore each (simultaneous sale and purchase) on February 25.