OMO Intervention Explained
The Reserve Bank of India (RBI) implemented an open market operation (OMO) on a Thursday, infusing Rs 50,000 crore into the market. This action was a response
to persistent liquidity issues, representing the second installment of a larger Rs 1 lakh crore OMO initiative previously announced by the central bank. During this OMO, the RBI received substantial bids, totaling Rs 1.39 lakh crore. The primary objective was to inject durable liquidity into the financial system, combating the deficit that had persisted for two consecutive days. This deficit was largely attributed to advanced tax outflows, despite the central bank's earlier efforts to provide liquidity through government securities purchases and a $5 billion dollar-rupee swap agreement. As of the preceding Wednesday, the system deficit was recorded at Rs 68.586 crore, indicating the scale of the challenge the RBI was addressing to stabilize the market.
Securities Purchased Details
In the OMO, the RBI strategically acquired seven specific dated stocks to manage liquidity. These securities included the 6.75% 2029, 6.10% 2031, 6.54% 2032, 7.18% 2033, 6.33% 2035, 7.23% 2039, and 7.09% 2054 papers. This diverse selection of government bonds aimed to provide targeted support to various segments of the market. The purchase of these bonds not only injected funds but also influenced yields, contributing to overall market stability. The selection of these particular securities reflects the RBI's approach to managing the yield curve and ensuring the smooth functioning of the government bond market. The OMO was an essential tool for the RBI to combat liquidity shortfalls and maintain financial stability by directly impacting the available funds in the banking system.
Context of Market
The RBI's intervention took place amidst a challenging financial landscape. The inter-bank liquidity deficit persisted for two days, largely due to advanced tax outflows, despite the RBI's measures to boost liquidity. This situation highlighted the complexities of managing liquidity, especially given the impact of tax payments. The advanced tax outflows created a temporary strain, requiring the RBI to intervene to mitigate its effects. The central bank had previously tried to ease liquidity through purchasing government securities and through a dollar-rupee swap deal worth $5 billion. On the Wednesday prior to the OMO, the system deficit was at Rs 68.586 crore, making it necessary for the RBI to undertake this OMO to maintain market stability.
