Market participants did not get much detail about the timing and the scale of OMO sales in the latest monetary policy statement, as the governor merely said the RBI will remain nimble in liquidity management.
The Reserve Bank of India (RBI) is unlikely to conduct open market operation (OMO) sales in December and January. Experts say possibilities of OMO sales in the current and the next month are low, and that the central bank will resort to such sales only in the case of a sustained and notably-high liquidity surplus.
“There is a low probability of OMO sales by the RBI in December and January. Structurally, liquidity will stay low with the expected rise in currency in circulation and advance tax payments,” said Debopam Chaudhuri, chief economist at Piramal Group.
Announcing the outcome of the Monetary Policy Committee meeting on October 6, RBI governor Shaktikanta Das had spooked the bond market by announcing the intention to conduct OMO sales to mop up excess liquidity from the banking system. However, OMO auctions did not happen in October and November due to tight liquidity conditions. Taking cues from the absence of OMO sales in the past two months, experts say bond sales may not happen unless the liquidity surplus is significantly high.
Market participants did not get much detail about the timing and the scale of OMO sales in the latest monetary policy statement, as the governor merely said the RBI will remain nimble in liquidity management.
“There were no OMO sales in the first week of December even though there was a surplus, which means that the RBI will not hold OMO sales unless and until the surplus is very high on a sustained basis,” said Soumyajit Niyogi, director – core analytical group, India Ratings & Research. He expects some easing in liquidity from next month due to government spending and large inflows from foreign portfolio investors.
“Government spending is expected to kick off in January, ahead of the election code of conduct. Secondly, in cases of large inflows into the debt market preceding the inclusion in global bond indices, if OMO sales occur, they would likely take place in February or March,” Niyogi said.
System liquidity turned into the deficit mode for the first time in September 2023 after a gap of nearly four-and-a-half years. Deficit liquidity conditions persisted during October and November, prompting large recourse to the marginal standing facility (MSF) by banks. Banks’ borrowing through MSF had touched an all-time high of Rs 2.34 trillion on November 22.
MSF borrowing averaged nearly Rs 0.95 trillion during September, which increased to Rs 1.2 trillion during October-November. Average fund parked under the SDF stood at Rs 0.62 trillion and Rs 0.58 trillion in October and November, respectively.
“The chances of OMO sales happening in December and January are quite remote,” said Madan Sabnavis, chief economist, Bank of Baroda. “It also depends on the credit growth of banks because high lending activity will take out excess liquidity from the system.”
Source:financialexpress.com