#Liquidityboost - Business Outrank

The Reserve Bank of India has declared new liquidity schemes in support of the financial system. It is estimated that the central bank will put in an amount of 1.25 trillion by means of open market operations, long-term variable rate repo auctions, and a dollar-rupee buy-sell swap. This is a timely action we might have seen because liquidity is tightening at the end of the financial year. According to the plan, the RBI is going to buy Government of India securities, 1 trillion of them, via OMO. The buys will be done in two 50,000 crore batches on February 5 and February 12. These purchases of bonds have been developed to inject long-term liquidity into the system. Besides that, the central bank will auction 90 day variable rate repo of 25,000 crore on January 30. This window enables the banks to borrow funds at long-run rates as dictated by the market. It offers a short-term extension of funds at the time of increased demand for credit. On February 4, the RBI will also conduct a rupee buy-sell swap of 10 billion dollars, with a tenor of three years. In this process, the central bank introduces liquidity in rupees as it is handling the foreign exchange reserves. The moves are made after analysing the existing liquidity and financial procedures, the officials said. Liquidity in the system has already become narrow. Recent statistics indicate that excessive funds dropped to almost 10000 crore on Thursday. Since the loan demand tends to increase during the final quarter of the fiscal year, other liquidity constraints may increase, and hence, the increase in funding costs of banks. The players in the market want to see more done. Economists reported that the RBI could carry out more OMOs to the tune of 1 trillion by the end of March. This would raise liquidity to approximately 0.9 percent of net demand and time liabilities, which the governor is comfortable with a 0.6 to 1 percent range. Analysts observed that OMOs continue playing the primary role of increasing liquidity. The buyer sells swaps; however, are not so popular to generate new liquidity but just to prolong the maturity of the forward book of RBI. According to the latest figures, there have been enhanced short dollar positions, which have changed to longer tenors. Bond dealers indicated OMO buys would put the benchmark 10 year government bond down two to three basis points. The RBI has repeated that these operations are done to control the liquidity, and not to have an effect on the yields. We find such clarity aiding in keeping the market expectations down to earth.

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