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Informist, Friday, Jan. 31, 2025

--RBI bought INR 208.50-bln gilts outside OMO auction in week ended Jan 24

NEW DELHI – The Reserve Bank of India bought gilts worth INR 208.50 billion outside open market operation auctions in the week ended Jan. 27. This was the second straight week of significant central bank purchases via on-screen secondary market operations, and the largest such buy since the week ended Feb. 12, 2021.

In the week ended Jan. 17, the RBI had bought 101.75 billion of gilts outside auction. With the liquidity deficit in the banking system widening due to RBI's intervention in the foreign exchange market, calls for open market purchase of gilts had been increasing. The large purchases come after weeks of speculation from analysts and market participants on whether the RBI would infuse durable liquidity, which slipped into deficit in January for the first time in over five years. Traders had shrugged off the RBI's gilt buys worth INR 200 million in the week ended Dec. 27 as insignificant.

Earlier this week, the central bank brought structured measures to infuse durable liquidity, in addition to the secondary market buys. Late on Monday, the RBI said it would purchase government bonds worth INR 600 billion via open market operations in three tranches, hold a six-month dollar/rupee buy/sell swap auction for $5 billion on Friday, and a 56-day variable rate repo auction for INR 500 billion on Feb. 7. The central bank added that it would "continue to monitor evolving liquidity and market conditions and take measures as appropriate to ensure orderly liquidity conditions".

In the first tranche of the OMO auctions, it bought INR 200.20 billion worth of four gilts on Thursday. Earlier Friday, it accepted $5.10 billion at the dollar/rupee buy/sell swap auction. 

To cool overnight rates amid tight liquidity, the central bank has also been conducting daily variable rate repo auctions since Jan. 16. The central bank's liquidity support has coincided with RBI Deputy Governor Rajeshwar Rao taking over the Monetary Policy Department from former deputy governor Michael Debabrata Patra. Latest data showed RBI bought gilts on all five days of the week. 

Bond market traders have been keenly tracking Clearing Corp. of India Ltd. data for clues on the RBI's buys in the secondary market. For the week ended Jan. 24, 'others' – a segment that comprises insurance companies, provident funds and the central bank – bought gilts worth INR 187 billion in the secondary market. For those five days, the RBI's net liquidity injected into the banking system was INR 2.61 trillion on average.

Earlier this month, economists at QuantEco Research said liquidity conditions were 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). Standard Chartered Bank also said liquidity management would be prioritised over interest rate cuts at the RBI's next monetary policy review in February. In its FY26 outlook, the bank estimated that the RBI would purchase gilts worth up to INR 1.50 trillion through open market purchases. 

In a meeting with RBI officials on Jan. 9, treasury officials from banks and primary dealers asked the central bank to infuse durable liquidity into the banking system. The methods suggested included open market bond purchase operations, as well as a cash reserve ratio cut or long-term dollar-rupee buy-sell swaps.  End

Reported by Aaryan Khanna

Edited by Avishek Dutta

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