With surprise OMO, RBI rolls sleeves for the Re fight

The Reserve Bank of India (RBI) announced a surprise open market operation (OMO) purchase auction of bonds for Rs12,000 crore on Monday.

That would mean the bond market will not fret about absorbing this week’s supply of Rs15,000 crore of paper, while the currency market will see the move indicative of aggressive intervention by the central bank.

The moot question is, will the RBI will come out with more OMOs or is this just a one-off signal that it is watching the situation and will step in when necessary?

The auction,  to be held on May 11, will help calm a bond market that was worried on the liquidity impact of a falling rupee.

Yields closed Monday at one-month highs with those on the ten-year benchmark bond, the 8.79% 2021, ending at 8.69% levels.

The rupee has fallen over 6.5% from levels seen in February 2012 on risk aversion due to sovereign debt worries in the euro zone.

The RBI had been buying bonds in the secondary market since the beginning of fiscal 2012-13 and had mopped up around `13,000 crore of paper, as of April 27.

The OMO announcement was not expected by the market as seen by the higher close of bond yields on Monday. This will bring down bond yields by 20 bps to 25bps on Tuesday, taking the ten-year yield to 8.45% to 8.50% levels.

The current liquidity conditions do not warrant an OMO with bids for repo at around `112,000 crore. Overnight rates have been hovering around the repo rate of 8% as banks have ample stock of government bonds to access the repo window for funds.

Hence, the announcement sends the signal that the RBI is either intervening directly in the currency markets to stabilise a falling rupee or is planning to intervene aggressively in case the rupee threatens to go on a free fall.

Last week, the RBI had freed rates on foreign currency export credit and increased rates on non-resident deposits to bring in more dollars into the country. It moves had a positive effect on the rupee, which moved up by 1% on Monday.

The postponement of General Anti-Avoidance Rules to next fiscal also helped strengthen the rupee as fears of FII selling subsided and equities turned positive from being deeply negative in the first of the trading day.

The writer is the editor of  ww.investorsareidiots.com,
a website for investors