Liquidity conditions are likely to remain tight and may not fall below Rs 1 lakh crore in the near term, despite the Reserve Bank of India (RBI)’s announcement of open market operations (OMOs) on Friday. After market hours today, RBI announced an OMO up to Rs 10,000 crore on Friday. OMOs are market operations conducted by RBI by way of sale/ purchase of government securities to adjust rupee liquidity conditions.
The government securities RBI will purchase through OMO are 7.32 per cent 2014, 7.59 per cent 2016, 8.15 per cent 2022 and 8.20 per cent 2025. “The liquidity deficit in the system is not expected to improve in a major way due to this. We need one more OMO next week and probably another one, depending upon the situation,” said Prasanna Patankar, senior vice-president, STCI Primary Dealer.
Today, banks borrowed Rs 1,28,400 crore from RBI’s daily liquidity adjustment facility (LAF), compared with an average borrowing of slightly above Rs 1 lakh crore last month, far ahead of RBI’s comfort zone.
But, the announcement of the OMO is expected to be positive for government bonds.
The Street believes to comfort liquidity conditions, government spending, having slowed down during the current financial year, should pick up. “Government spending needs to flow into the system to bring down the liquidity deficit. OMO will just support the market. There is oil subsidy worth Rs 25,000 crore that is expected. This fiscal, the government has been trying to control its spending to keep the fiscal deficit under control,” said a treasury official of a private sector bank.
The government has been trying to control spending in a bid to stick to the fiscal deficit target of 5.3 per cent of GDP for FY13. Last Friday, the government had cancelled the last scheduled auction of government bonds worth Rs 12,000 crore.
As the final instalment of corporate advance tax is due on March 15, the Street expects the liquidity deficit to worsen. “Around the first 10-12 days of March, the system loses around Rs 15,000-20,000 crore on account of rise of currency with public.