RBI Buys $5.5 Billion of Bonds at First Auction Since May

India’s central bank bought 500 billion rupees ($5.5 billion) of bonds, as planned, as it seeks to boost liquidity in the banking system.

The cutoff prices at the auction, which had bonds with maturities ranging from 2029 to 2050, were mostly higher than estimates in a Bloomberg News poll. Yields fell after the Reserve Bank of India published the auction results on Thursday.

The purchase is part of RBI’s plan to inject one trillion rupees worth of liquidity via bond purchase and $5 billion equivalent via a foreign exchange swap this month. The central bank’s efforts to shield the rupee, Asia’s worst-performing currency this year, have drained cash from the system, along with seasonal liquidity strains. 

The monetary authority’s open market operations via bond buying can help offset the cash squeeze and cap a rise in market interest rates. Yields on the benchmark 10-year bond have risen nearly 12 basis points this week despite a quarter-point interest-rate cut and the liquidity injection plan by the RBI last Friday. 

A global rates repricing, a likely end of the domestic rate-cut cycle, as well as a demand-supply skew have been weighing on local bonds.

Thursday’s auction was the first announced OMO purchase since May. The authority injected 5.2 trillion rupees worth of liquidity earlier this year to bolster liquidity. It bought 273 billion rupees of bonds via screen-based purchases in November.

The RBI may need to do additional durable liquidity injection, potentially upto 800 billion rupees or more in the March quarter, depending on the severity of balance of payments pressures and the scale of its FX operations, according to Madhavi Arora, lead economist at Emkay Global Financial Services Ltd.