Mint Business News - Official Channel

RBI to hold special OMOs of ₹10,000 crore each this week

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MUMBAI: The Reserve Bank of India (RBI) on Monday said it will conduct the second auction of the scheduled purchase and sale of government securities under the special open market operation (OMO) worth ₹10,000 crore each on 17 September. RBI had conducted the first auction worth ₹10,000 crore each on 10 September.

Typically, the central bank conducts OMO sales to suck out excess liquidity from the financial system, or OMO purchases to infuse liquidity in a single day.

The RBI said it will purchase two new long-term government securities, maturing in 2023 and 2025, in addition to the 10-year bond maturing in 2030. Short-term securities include 7.37% maturing on 16 April 2023 and 7.72% maturing on 25 May 2025.

Simultaneously, RBI will sell 182-day Treasury bills maturing on 22 October and 29 October this year.

According to a study published by the RBI in the annual report, the announcements on Operation Twist conducted from December to June have resulted in a cumulative fall in G-sec yield by 23 basis points

The Reserve Bank had last used this tool in April and July of this fiscal year to accelerate the monetary transmission in the system.

According to RBI, the transmission to bank lending rates has improved, with the weighted average lending rate (WALR) on fresh rupee loans declining by 91 bps during March-June 2020. The spreads of 3-year AAA rated corporate bonds over G-Secs of similar maturity has declined from 276 bps on 26 March 2020 to 50 bps by end-July 2020. Even for the lowest investment grade bonds (BBB-), spreads have come down by 125 bps by end-July 2020.

The central bank’s simultaneous sale and purchase of government bonds, along the lines of the US Federal Reserve’s Operation Twist, is expected to stimulate private sector borrowing, as well as dampen term premia to aid the centre’s borrowing programme by making it cheaper.