RBI steps in to tame runaway bond yields, attract dollars
Published: 27 Sep, 2013
The Reserve Bank of India (RBI) has indicated that it would use open market operations (OMOs) to ensure adequate liquidity in the system and soothe rising bond yields.
Under OMOs, the central bank purchases government securities from banks in an auction, thereby releasing cash in the system.
In its assurance on liquidity management released on Wednesday, the central bank said it was monitoring liquidity conditions closely and continuously. The central bank said it would take actions as appropriate, including OMOs, to ensure that adequate liquidity is available to support the flow of credit to productive sectors of the economy.
Currently, the RBI is injecting Rs 1.5 lakh crore into the system on a daily basis through the liquidity adjustment facility, the export credit refinance facility and the marginal standing facility (MSF). Last week, borrowings under MSF alone had shot up to Rs 1.5 lakh crore.
To be sure, banks have little option but to access the MSF window at higher interest rate as their borrowing capacity under the repo window is still capped at 0.5% of net demand and time liabilities.
The MSF rate was reduced to 9.5% from 10.25% in the mid-quarter monetary policy review on Friday. The move was expected to give immediate relief to banks in terms of their cost of funds. Bond yields were expected to cool down. Instead, they have been rising.
The RBI attributed the rise in yields to uncertainty around the government borrowing programme for the second half of this fiscal.
On Monday, the government said it would borrow Rs 2.35 lakh crore in the October-March period, in line with the budgeted market borrowing programme.
RBI said factors such as banks half-yearly account closure, the seasonal pick-up in credit demand, festival-related demand for currency and sluggish deposit growth also contributed in bloating up the bond yields.
Yields on government bonds rose 20-30 basis points (bps) so far this week. The yield on the 10-year benchmark government bond had jumped to 8.85% on Monday, spooked by the unexpected repo rate hike of 25 bps by the RBI in the mid-quarter monetary policy review.
In another move, the RBI further eased norms for banks to avail the foreign currency swap facility at concessional rates. Banks are now allowed to use foreign currency borrowings of a minimum one-year maturity instead of three years as stated earlier. However, the enhancement is limited to any borrowings made before November 30, 2013. After that, the minimum maturity of foreign currency will be three years.
On September 10, the RBI had said authorised dealer banks falling under category-I could borrow funds from their head office, overseas branches and correspondents and overdrafts in nostro accounts up to a limit of 100% of their unimpaired Tier-I capital as at the close of the previous quarter, or $10 million, whichever was higher. This is expected to attract more dollars and improve the rupee liquidity position of banks.
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