By Swati Bhat and Siddhi Nayak
MUMBAI (Reuters) – India’s central bank will conduct open market sales of bonds once government spending picks up and there is an improvement in the durable liquidity surplus, two sources aware of the development told Reuters on Friday.
“Currently, government spending is low and core liquidity is in a surplus of 3 trillion rupees ($36.11 billion)-3.5 trillion rupees,” one of the sources, who is familiar with the central bank’s thinking, said.
Core liquidity surplus includes the government’s cash balances held with the central bank.
Earlier this month, the Reserve Bank of India (RBI) 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 uncertainty has made bond investors nervous, and pushed up yields.
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 source said.
“The RBI is going to look through frictional changes in liquidity and conduct OMO sales only when there is a durable surplus,” the second person said. “OMOs will be purely need based.”
None of the sources wished to be identified as they were not authorised to speak to the media. The RBI did not immediately respond to a Reuters’ request for comment.
Frictional changes refer to short-term swings in banking liquidity while longer-term withdrawal or addition of cash impact durable liquidity.
Banking system liquidity – the amount of funds in the interbank system – was in a deficit of nearly 179 billion rupees on Thursday, wider than Wednesday’s 30-billion-rupee deficit.
Banking liquidity is expected to move back to surplus by early November on government expenditure and as bonds worth around 540 billion rupees mature on Nov. 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, said.
Likely inflow from RBI’s forex swap maturity, bond redemptions through December and government spending could trigger bond sales, Bansal added.
($1 = 83.0891 Indian rupees)
(Reporting by Swati Bhat and Siddhi Nayak; Editing by Mrigank Dhaniwala)
