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.
