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RBI Expected to Expand OMO Purchases

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Context:

The bond market anticipates an expansion in the Reserve Bank of India’s (RBI) Open Market Operation (OMO) purchases due to persistent liquidity shortages. The liquidity deficit has remained around ₹2 trillion for the past eight weeks, prompting expectations of increased intervention by the central bank.

Key Highlights:

  • Liquidity Deficit Situation
    • The financial system has faced a liquidity shortfall since December 16, 2024.
    • On February 7, core liquidity was in deficit by ₹40,000 crore.
    • As of Wednesday, the overall banking system deficit stood at ₹2.07 trillion.
  • Expected OMO Expansion
    • The RBI may increase the upcoming OMO auction amount from ₹20,000 crore to ₹40,000 crore.
    • Market participants anticipate further OMO announcements beyond the next auction.
    • The central bank has already conducted three OMO auctions to date.
  • Use of OMO Funds and Forex Intervention
    • The RBI has been utilizing liquidity infusion for forex market interventions.
    • It is estimated that the central bank sold $12-14 billion this week to stabilize the rupee.
    • Despite these efforts, the rupee remained mostly stable, closing at 86.92 against the dollar on Thursday, slightly lower than 86.89 on Wednesday.
  • Recent OMO Auction Insights
    • The RBI conducted an OMO auction on Thursday, purchasing ₹40,000 crore worth of securities.
    • The auction received bids totaling ₹1.8 trillion (4.5 times the notified amount).
    • State-owned banks were reportedly the largest participants in the auction.

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