With net liquidity deficit in the banking system having risen to more than ₹1.5 lakh crore over the last few days, the weighted average call rate (WACR), which represents banks’ borrowing costs, has shot above the upper end of the RBI’s interest rate corridor.
“Pressure to carry out OMO sales has definitely come down significantly because liquidity conditions have stayed tight and more significantly it is the fall in core liquidity surplus that has played a prominent role in keeping liquidity conditions tight,” said Abhishek Upadhyay, senior economist at ICICI Securities Primary Dealership.
Core liquidity takes into account the government’s cash balances, which periodically flow in and out of the banking system. Sales of government bonds through open market operations are a method used by the RBI to durably drain the banking system of excess liquidity, which poses inflation risks. RBI governor Shaktikanta Das had said on October 6 that the central bank would undertake OMO sales as necessary.
“Currency outflows have finally picked up after lagging earlier, and of late there have been FX outflows as well. Core liquidity surplus, which was closer to ₹3.4 trillion, before the RBI met in October, should be down to something like ₹2.2 trillion now,” Upadhyay said.
Das’ comments had pushed up the 10-year benchmark government bond yield by as much as 16 basis points to a seven-month high of 7.38%, as the market braced for extra supply of securities.
Higher government bond yields lead to a rise in overall borrowing costs in the economy.While redemptions of government bonds worth ₹89,072 crore over the next five days are expected to ease the tightness, analysts do not expect liquidity to revert to a large enough surplus to warrant OMO sales.
“We don’t think they will come out with a standalone OMO sale announcement at this juncture,” said Vivek Kumar, economist, Quanteco Research.