RBI’s move to inject liquidity seen as a positive for bond prices

Mumbai: The Reserve Bank has decided to inject more liquidity into the banking system through the purchase of Government bonds for an aggregate amount of Rs 1.25 lakh crore in May.

The move is also expected to prop up bond prices, which had declined due to a sell-off by foreign banks and primary dealers after the uncertainty triggered by the Pahalgam attack.

The RBI’s open market operations (OMO) to purchase government bonds will be carried out in four tranches between May 6 and May 19.

The decision was taken after a review of current and evolving liquidity conditions, according to an RBI statement.

The move comes close on the heels of the RBI’s announcement on April 1 to buy government bonds worth Rs 80,000 crore, which was followed by another Rs 40,000 crore purchase announced on April 11.

RBI Governor Sanjay Malhotra has stated that the central bank will continue to monitor evolving liquidity and market conditions and take measures as appropriate to ensure orderly liquidity conditions.

The bond purchases are in continuation of the RBI’s recent measures to inject liquidity into the system. In March, it conducted OMO purchases of government securities worth Rs 1 lakh crore in two tranches of Rs 50,000 crore each.

The central bank also held a dollar-rupee buy/sell swap auction of $10 billion for 36 months. Besides, the central bank this week reduced borrowing costs by cutting the benchmark repo rate by 25 basis points and changing its neutral stance to accommodative. The steps were taken as part of the soft money policy to spur economic growth, as the inflation rate has come down.

According to financial analysts, the fresh liquidity infusion is also expected to help fetch a better price for the new benchmark bond, which would be auctioned on May 2.

The RBI announced the new bond after the old benchmark bond completed the outstanding amount of Rs 1.84 lakh crore.

–IANS