The Reserve Bank of India on Tuesday announced that it will conduct purchase and sale of government securities worth Rs 20,000 crore as part of Open Market Operation (OMO). The OMO will be conducted in two tranches on August 27 and September 3.
The two tranches will be worth Rs 10,000 crore each on multi-security auction using multiple price method, the central bank said in a statement.
“Eligible participants should submit their bids/offers in electronic format on the Reserve Bank of India Core Banking Solution (E-Kuber) system between 10:00 am and 11:00 am on August 27, 2020,” the RBI added. The results of the auction will be announced on the same day.
The RBI said that it will continue to monitor evolving liquidity and market conditions and take measures as appropriate to ensure the orderly functioning of financial markets.
RBi had previously conducted OMO in October worth Rs 10,000 crore to maintain liquidity.
Such bond buy and sell operations, however, are a way of softening long-term yields that help the government borrow cheap. Besides, they also give the central bank enough long-term bonds to support its liquidity operations. The central bank has to offer bonds to banks keeping their surplus liquidity with the central bank and for that, it must have enough bonds. Once the bonds mature in RBI holding, the central bank may fall short of such bonds. The buy and sell OMO operations protect the central bank from such an option.
Earlier, an article published in the RBI’s bulletin said that the Reserve Bank will continue to monitor evolving liquidity and market conditions and take measures as appropriate to ensure the orderly functioning of financial markets. The Reserve Bank of India (RBI) initiated two special market operations — OT and LTRO since December 2019 and February 2020, respectively. They were designed to ensure comfortable liquidity in the financial system and to facilitate monetary policy transmission.
OT involves buying of GSECs with longer-term maturities — ten years and five years — and selling of shorter-term GSECs of original/ residual maturities of one and three years.
LTROs are repurchase agreements collateralised by government securities, by which the central bank lends money to the banks for one to three years at the policy repo rate.