Reserve Bank of India announced liquidity measures on Monday to diminish the fear of the market over rising yields and higher borrowing program.
The amount that banks invest in government securities or the held to maturity limit (HTM) increased from 19.5% to 22%. Additional open market operations worth rupees 20,000 crores and term repo operations worth 1 trillion rupees were announced to infuse liquidity into the market.
Swapping of funds raised under the long-term repo operations (LTRO) at 5.15% with the new funds which were made under the 1 trillion rupees repo window at 4% to reduce the cost of funds for the banks were also allowed by the Reserve Bank of India.
Market operations as and when required will be conducted by the Reserve Bank of India to ensure orderly market functioning. The concerns relating to the inflation outlook and the fiscal situation amidst the global developments that have firmed up yields abroad has affected the market sentiments.
To revive the economy, the Central Bank assured that the Reserve Bank of India is committed to using all instruments at its command and maintaining congenial financial conditions, mitigating the impact of the financial crisis caused by COVID-19, and to restore the economy to a path of sustainable growth while maintaining financial and macroeconomic stability.
The Central Bank also assured that the government borrowing program of the Central Government and the State Governments for the year 2020-2021 will be completed in a non-disruptive manner.
The auction of the 10-year Government Securities to raise rupees 18,000 crores failed at the time when the liquidity measures were announced, making it the second consecutive time this month when the 10-year paper failed to receive any interest from the buyers, forcing the primary dealers to absorb the quantum.
The yields have risen by 36 basis points over the last four weeks, over the worries that retail inflation could cross 7% over three months, even as economic recovery lags.
The headline inflation could remain elevated over the second quarter, however, it would moderate in the second half, according to the statement by the Monetary Policy Committee (MPC) in its statement on 6th August. Food and fuel prices are stabilizing and the cost-push factors are moderating. The recent appreciation of the rupee is likely to have an impact on imported inflationary pressures. Taking this into account, MPC has decided to pause and remain watchful and use the available space judiciously for the revival of the economy.