RBI uses OMOs to absorb excess rupee from the system

June 18, 2014

The Reserve Bank of India (RBI) conducted Open Market Operations (OMOs) to sell Rs 2,255 crore of government bonds between June 2 to June 6, 2014, to absorb excess rupee liquidity it has injected into the system through dollar purchasing. As per market experts, the apex bank may have also been trying to curb volatility in government securities through these OMOs.
Some traders apprehend that if RBI continues the practice then bond prices may fall. Since the beginning of the new financial year on April 1, 2014, these have been the RBI’s largest sale of government bonds through OMOs, a platform where the apex bank anonymously sells or buys government securities in the secondary market.
The main motive behind the RBI’s measure was probably the excess rupee liquidity in the system.
The RBI’s dollar buying has brought in rupee liquidity into the system, besides the central bank’s routine term repo windows, where banks can borrow for a stipulated period like 4 to 28 days. For instance, it did a 28-day term repo for Rs 20,000 crore on June 6, 2014. To neutralize its impact, it has already begun selling in the rupee forwards market. During April 2014, the RBI sold about $1 billion, taking the outstanding net forwards sales to $32.06 billion.