Mumbai: In a bid to meet the perceived liquidity crunch due to upcoming redemption of $20 billion, RBI on Tuesday announced of pumping Rs 10,000 crore by buying government securities.

Based on the current assessment of prevailing and evolving liquidity conditions, the Reserve Bank has decided to conduct purchase of Government securities under Open Market Operations for an aggregate amount of Rs 10,000 crore on August 11 through multi-security auction using the multiple price method, according to a statement from RBI.

Earlier in the day, RBI Governor Raghuram Rajan said: “As we have reiterated in the past, we do not see the FCNR(B) repayments as disruptive. With the preparation we have made, and good management, redemptions should go smoothly. More generally, the new liquidity framework announced in the April policy is being implemented. We have reduced some of the structural liquidity deficit.”

However, he further said that the current surplus was partly because of seasonal factors and not because RBI has eliminated the structural deficit. To emphasise this point, RBI announced an Open Market Purchase. The RBI will proceed in a calibrated way towards the goal of eliminating the structural deficit.

When we have done so, episodes of systemic surplus and systemic deficit should be evenly balanced. Open Market Operations are market operations conducted by RBI by way of sale or purchase of government securities to or from the market with an objective to adjust the rupee liquidity conditions in the market on a durable basis. If there is an excess liquidity, RBI resorts to sale of securities and sucks out the rupee liquidity. Similarly, when the liquidity conditions are tight, RBI buys securities from the market, thereby releasing liquidity into the market
Raghuram Rajan, Outgoing RBI Governor

“When we have done so, episodes of systemic surplus and systemic deficit should be evenly balanced. Open Market Operations are market operations conducted by RBI by way of sale or purchase of government securities to or from the market with an objective to adjust the rupee liquidity conditions in the market on a durable basis. If there is an excess liquidity, RBI resorts to sale of securities and sucks out the rupee liquidity. Similarly, when the liquidity conditions are tight, RBI buys securities from the market, thereby releasing liquidity into the market,” said Rajan.

In the Third Bi-monthly Policy Statement for 2016-17, RBI Governor Raghuram Rajan said as regards the management of the imminent FCNR(B) redemptions, the central bank has been front loading liquidity provision through open market operations and spot interventions/deliveries of forward purchases.

The Reserve Bank will continue with both domestic liquidity operations and foreign exchange interventions that should also enable management of the FCNR(B) redemptions without market disruptions, he said. The Governor had earlier said that he expects there would be outflows of $20 billion because of the maturing process as people have borrowed money to invest in the FCNR-B deposits.

Source: PTI