RBI To Buy Rs 1 Lakh Crore Of Bonds, Execute $5 Billion Three-Year Forex Swap To Boost Liquidity

The Reserve Bank of India announced that it will buy government securities of Rs 1 lakh crore through open market operation in December. The central bank will also conduct a currency swap worth $5 billion this month, wherein it will buy dollars and sell them back three years later, the regulator's governor Sanjay Malhotra said on Friday.

RBI's move is aimed at injecting durable liquidity into the system, Malhotra explained as the monetary policy committee lowered the benchmark repo rate by 25 basis points to 5.25%.

Following the liquidity remarks, the yield on the 10-year benchmark bond fell to 6.45% but recovered slightly shortly after. The Indian Rupee, too, weakened past the 90 per dollar mark for the second time this week.

RBI's purchases of government securities are likely to offset the cash outgo which emerged out of its dollar sales in the currency market. The currency market sales were done in a bid to support a weakening rupee, which fell past the psychologically significant barrier of 90 per dollar for the first time earlier this week.

The main purpose of open-market bond purchases is to infuse primary liquidity and not to influence bond yields, Malhotra added on Friday.

"Announcing OMO perhaps suggests that the RBI is cognizant of g-sec yields," Anitha Rangan, chief economist at RBL Bank said.

"In addition, 3- year forex swap suggests that the RBI is aware of the forex risks. They have done swaps in the past and there is possibility of more support if required," she explained, adding that the support from OMOs and forex could continue.

"The liquidity boost through OMOs and the USD/INR swap will help lower funding costs and improve credit transmission," Ravi Singh, chief research officer from Master Capital Services said.

The open market purchases of government bonds worth Rs 1 lakh crore will be done in two tranches of Rs 50,000 crore each, the Reserve Bank said. The first tranche will be conducted on Dec. 11, while the second tranche will be conducted on Dec. 18.

The dollar/rupee buy sell-swaps worth $5 billion will be conducted on Dec. 16, the RBI said.