OMO bond purchase likely next week, if RBI FX intervention continues

The Reserve Bank of India may likely announce Open Market Operations (OMO) purchase of government securities next week if the central bank continues intervention in the foreign exchange market, leading to tightness in rupee liquidity.

  Also, Goods and Services Tax (GST) along with regular debt auction outflows would add to the tightness in the banking liquidity.

  "Going forward, liquidity in the banking system would be more or less range-bound next week, a little tighter. I can say from current levels, due to GST payouts, and regular debt supply. There is a possibility of RBI coming up with OMO next week," Devang Shah, Deputy head-fixed income at Axis Mutual Fund said.

  Liquidity conditions tightened last week with surplus declining and briefly turning into deficit on the back of non-GST and regular auctions outflows.

  "We expect RBI dividend, auction inflows, and non-GST excise tax collections to have helped in building balances last week while CMB maturity and coupon flows would have led to some drainage. Given that the liquidity surplus was slightly lower than our expectation, the government could have possibly paid back in part the WMA to RBI," Kotak Economic Research said in a note.

  Also, next week, bankers expect liquidity to be sucked out of the banking system in the form of Goods and Services Tax outflows of around Rs 960-980 billion for July.

  However, the turning point is the RBI intervention in the foreign exchange market as rupee depreciated towards record low of Rs 69.88/$1 Monday.

  RBI sold around $250 million (i.e, nearly Rs 17.40 billion) on Monday after rupee depreciated to Rs 69.61/$1 during morning trade.

  "This means $250 million worth of dollar were sold, or Rs 17.40 billion worth of rupee was sucked out from the banking system by the RBI on Monday.

  Market analysts believe if the local currency continues to remain weak, there are chances of central bank injecting some flows through OMO purchase.

  "The chances of conduction of OMO purchase have become stronger for next week as RBI intervention in the forex market along with GST outflows are going to put pressure on the banking liquidity. We may see an OMO purchase likely in next week," a senior official with foreign bank said who doesn’t wish to be identified.

  Meanwhile, Param Sarma, CEO of NSP Treasury Risk Management believes that RBI is determined to interven in FX market if rupee falls beyond Rs 70/$1, as the input cost of the imported items, especially oil, may hike the retail inflation beyond the 5.5% level or higher.

  Local financial newswire reported officials in the Finance Ministry as saying that favour more RBI OMO bond purchase owing to liquidity tightness in the banking system.

INFLOWS AND OUTFLOWS THIS WEEK:

  As per Kotak Mahindra Bank’s Economic Research, liquidity in the banking system for the current week is as given below:

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