RBI to conduct open market bond sales to absorb durable liquidity: Report

The Reserve Bank of India (RBI) will conduct open market sales of bonds once government spending picks up and there is an improvement in the durable liquidity surplus, news agency Reuters reported citing two sources aware of the development.

"Currently, government spending is low and core liquidity is in surplus of Rs 3 lakh crore to Rs 3.5 lakh crore," one of the sources mentioned in the report said.

Core liquidity surplus includes the government's cash balances held with the RBI. The central bank, earlier this month, said it will sell bonds through open market operations (OMOs) to manage banking system liquidity. However, it did not disclose the quantum or timing of the bond sales.

The yields have been pushed up because of this uncertainty with regard to the bond sales, the report said. According to the source quoted by Reuters, in spite of plans to lower the amount of cash in the banking system, the RBI would prefer to keep liquidity in "some surplus" to help the productive sectors of the economy.

"The RBI is going to look through frictional changes in liquidity and conduct Open Market Operations (OMO) only when there is a durable surplus," the second person mentioned in the report said. “OMOs will be purely need based.”

Banking system liquidity - the amount of funds in the interbank system - was in a deficit of nearly Rs 17,900 crore on Thursday, wider than Wednesday's Rs 3000 crore deficit. By early November, the banking liquidity is expected to move back to surplus on government expenditure and as bonds worth around Rs 54,000 crore on November 2.

RBI's bond sales "will be triggered once liquidity in the system is in surplus and that may cause inflationary pressures," Arun Bansal, executive director and head of treasury at IDBI Bank, told Reuters.