Live From The Field

The objective of the liquidity operations conducted by the Reserve Bank of India (RBI) is not to manage the price of bonds, but to drive its monetary policy goals to manage money supply in the system, said the central banks Deputy Governor Viral Acharya, dampening expectations of bond purchases by RBI.

In the third consecutive pause, RBI kept its main repo rate unchanged at 6.00 percent and retained its neutral stance, in a support to economic growth even as it cited inflationary pressures for the fourth quarter to be at 5.1%.

Except in rare, extraordinary economy wide circumstances the goal of RBIs liquidity operations is not to manage directly the prices of any long term asset market. In the present circumstances, economic analysis has been referring to froth chasing one asset market and there being tight liquidity in another, Acharya said addressing the media in a post policy press conference.

In order to keep the liquidity (money supply) conditions in the system to be neutral, RBI uses instruments such as repo operations, Market Stabilization Scheme (MSS) and open market operations (OMOs) among others.

related news TRAI to check call drops in Delhi via ‘drive tests’ Take Solutions records third quarter net profit at Rs 41.95 crore Air India waives ticket cancellation charges for Male flights

In case of a liquidity deficit, the RBI injects money through sale of bonds through such instruments or issue bonds to suck out excess liquidity from the system.

Speaking on liquidity operations, Acharya said, While the RBI remains ready to provide liquidity to meet such frictional needs (like in days of liquidity deficit for few days in December and January), I would like to reiterate that RBIs liquidity operations are driven by its monetary policy objectives and the need to meet economys demand for reserves that also factor in the indirect liquidity injections through forex operations.

The yield on Indias benchmark 10-year government bond ended at 7.53 percentafter touching 7.61 percent during the day, down from its previous close of 7.57 percent. Bond yields and prices move in opposite directions.

According to Acharya, The resulting asset price and yield implications are, therefore, unlikely driven by aggregate liquidity conditions which somewhat, as I mentioned, remain in surplus mode.

More likely to be at work are fundamental factors such as domestic inflation and macro as well as global rates and commodity cycles and perhaps also technical factors such as the relative supply of paper by respective issuers in the two markets, he said.

According to a Reuters report, the finance ministry is expected to raise its concerns about the sharp rise in bond yields when it holds a meeting this week with the central bank to discuss government borrowing plans for the year.

The report quoted a source saying the government would raise the idea of the RBI buying bonds via open market operations (OMOs) to keep yields lower and inject liquidity.

Leave a Reply

Your email address will not be published. Required fields are marked *