MUMBAI: The Reserve Bank of India sold Rs 2,255 crore of government bonds between June 2 and 6 to suck out excess rupee liquidity it has injected into the system through dollar buying. According to some market players, the central bank may have also been trying to check volatility in government securities through these unusually large open-market sales.
Bond prices may fall if the RBI extends the practice, some traders fear. Since the current financial year began on April 1, these were the RBI’s largest sale of government bonds through outright open-market operations, a platform where the central bank anonymously sells or buys government securities in the secondary market. On May 29 and 30, the last two working days of the previous month, the RBI cumulatively sold bonds worth Rs 4.25 billion. Other than these, there were no such standalone open-market operations in fiscal 2015.

According to Ajay Manglunia, head of fixed income at Edelweiss Securities, the RBI may carry on with such sales if the benchmark bond yield remains highly volatile. The benchmark government bond yielded 8.80-8.55% over the past one-and-a-half months. But, the primary reason for the RBI’s move was likely the excess rupee liquidity. To stem the rupee’s sharp appreciation against the US dollar in recent months, the central bank net bought $5.87 billion in April and $7.78 billion in March in the currency market. So far in 2014, the rupee rose 2.81% against the greenback, after dropping about 13% in 2013.

The RBI’s dollar buying has injected rupee liquidity into the system, in addition to the central bank’s routine term repo windows, where banks can borrow for a stipulated period like four days to 28 days. For example, it did a 28-day term repo for Rs 20,000 crore on June 6. To sterilise its impact, it has already started selling in the rupee forwards market. During April, the RBI sold about $1 billion, taking the outstanding net forwards sales to $32.06 billion. However, liquidity has now become tight, which is evident from the overnight interbank call money rate. On Monday, the weighted average overnight call money rate was at 8.78%.

It was hovering around 7% on May 30. “This RBI selling can be termed as liquidity intervention,” RK Gurumurthy, head treasurer at Lakshmi Vilas Bank, said. “What we need to see is the selling stock.” Some traders were of the opinion that it might be a combination of long- and short-term bonds. The RBI also needs to build the stock of bonds as it conducts term repo and reverse repo auctions by buying or selling government bonds. The Reserve Bank’s first four-day term reverse repo on June 2 had found only a few takers with bids from banks accounting for less than a sixth of the Rs 15,000-crore target.

That too was aimed at sucking out excess liquidity. Through reverse term repo, banks park excess liquidity with the RBI.