Between November 10 and December 13 this year, the central bank sold sovereign securities through outright secondary market deals in consecutive weeks, show the latest RBI data compiled by ET.
“This move is primarily aimed at absorbing durable liquidity, which cannot be pursued through VRRR,” said Naveen Singh, head of trading at ICICI Securities PD. “The move is also a step towards monetary policy normalisation as this will also lead to RBI’s balance sheet contraction.”
Mint Road uses Variable Rate Reverse Repo (VRRR) auctions to primarily drain short-term liquidity. The RBI has been conducting VRRR in large quantities. The auction amount was progressively enhanced to Rs 6 lakh crore by December 3.
In its December bi-monthly policy, RBI proposed to enhance the 14-day VRRR auction amounts on a fortnightly basis in the following manner: Rs 6.5 lakh crore on December 17; and further to Rs 7.5 lakh crore on December 31.
In between, it sprang a surprise introducing two three-day VRRR auctions offering to suck out up to Rs 2 lakh crore each time.
The Reserve Bank will continue to rebalance liquidity conditions in a non-disruptive manner, according to RBI governor Shaktikanta Das.
“The recent series of secondary market bond sales may be aimed at sensitizing the markets to possible OMO sales later to mop up durable excess liquidity,” said Mahendra Jajoo, CIO – fixed income at Mirae Asset Management. “This also helps balance interest rates across tenures keeping yields in sync with the central bank’s stated gradual liquidity normalisation stance.”
“This will prevent any unwarranted disruption in interest rates due to winding liquidity,” he said.
About a year ago, the central bank used to purchase bonds via open market operations attempting to infuse durable liquidity into the system.
Due to liquidity normalisation, shorter duration rates have gone up. Treasury Bill yields shot up by 16-19 basis points since November 10. Money market rates, too, have increased with VRRR auctions yielding mostly repo rates, pegged at 4 percent.
During the same period, the benchmark 10-year yield rose by 12 basis points. A basis point is 0.01 percent.
The minutes of the last policy committee meeting showed that member Ashima Goyal noted the stoppage in addition to durable liquidity.
“But the next step is to decrease excess durable liquidity itself. Some of this will be absorbed as growth rises,” she said.