RBI to purchase government additional bonds to infuse liquidity in market

Reserve Bank of India (RBI) is like to conduct additional open market operation (OMO) purchase worth USD 40 billion by March end to provide durable liquidity and contain rising government bond yields, says a report.

Last week, RBI conducted one OMO worth Rs 10,000 crore and has announced a similar amount of OMO purchase this week, "We continue to expect the RBI to issue an OMO calendar that will assure durable liquidity, contain rising yields, reverse FPI outflows and stabilize rupee," Bank of America Merrill Lynch said in a report.

It said OMOs should attract debt FPIs who can then reap potential capital gains which would help stabilize rupee. The RBI will also then be able to avert a liquidity crunch with growth set to slow after October with base effects fading, it said.

The RBI, however, is delaying OMO, as it fears that this will signal weaker rupee and discourage debt FPIs, the report said.

"It (RBI) likely fears markets could see an infusion of rupee liquidity as a policy preference for a weaker rupee undermining its 4 percent CPI target. We estimate one percent depreciation impacts inflation by 20 basis points," the report said. If FPI flows do not revive, the RBI will need to OMO an even larger USD 50 billion by March, it added.