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Informist, Friday, Jan. 10, 2025

NEW DELHI – The Reserve Bank of India data on Friday showed it did not buy or sell gilts through screen-based operations in the week ended Jan. 3, a week after it bought gilts worth INR 200 million. The purchases in the week ended Dec. 27 were the first screen-based gilt buys by the RBI in over five months.

Market expectations of the RBI conducting open-market gilt purchases have increased due to the tight liquidity in the banking system. On Thursday, the RBI injected a net INR 2.01 trillion, compared with INR 511.23 billion being absorbed on Dec. 1, with a combination of outflows due to tax payments and the central bank's interventions in the foreign exchange market to stabilise the exchange rate draining rupee liquidity from the banking system.

Bond market traders have been expecting the data to show large RBI purchases, worth billions of rupees, since December. Since the central bank has refrained from large purchases through screen-based operations so far, traders said the RBI is likely to announce open market purchases through an auction when it wants to infuse liquidity.

In a meeting with RBI officials on Thursday, treasury officials from banks and primary dealers asked the central bank to infuse durable liquidity into the banking system through open market purchase operations for government bonds, among other measures. 

Economists at QuantEco Research think liquidity conditions are now an "immediate policy priority" for the RBI. They expect the central bank to conduct OMO purchases to the tune of INR 3.0 trillion starting this month and until the end of 2025-26 (Apr-Mar). According to Nomura rates strategist Nathan Sribalasundaram, open market purchases are "becoming more likely". Standard Chartered Bank also said liquidity management will now be prioritised over interest rate cuts at the RBI's next monetary policy review in February.

Before the purchases of gilts in the week ended Dec. 27, the RBI had largely been on the selling side in the current financial year. Between Jul. 5 and Sept. 20, the central bank net sold gilts worth INR 240.40 billion through OMOs, data showed. The pace of these sales had slowed, before halting in the week ended Sept. 27. At that time, banking system liquidity had been in a heavy surplus.  End

Reported by Aaryan Khanna

Edited by Saji George Titus

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