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RBI Announced Additional OMO of Rs 20,000 Cr to Ensure Orderly Market Conditions; HTM raised to 22% from 19.5%

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RBI-announces-liquidity-measures-to-ensure-orderly-market-conditionsOn August 31, 2020, Reserve Bank of India (RBI) announced measures in order to ensure orderly market conditions and congenial financial conditions. In this regard Reserve Bank will conduct additional special open market operations (OMO) involving the simultaneous purchase and sale of Government securities (G-secs) for Rs 20,000 crore in two tranches of  Rs 10,000 crore each on September 10, 2020 and September 17, 2020.

  • The apex bank also announced term repo operations of Rs 100,000 crore (1 trillion) to infuse liquidity into the market.
  • The Reserve Bank also increased the held to maturity limit (HTM) or the amount that banks invest in G-secs from 19.5% to 22%. Therefore, banks can hold fresh acquisitions of SLR (Statutory Liquidity Ratio) securities acquired from September 1, 2020 under HTM up to an overall limit of 22% of net demand and time liabilities (NDTL) up to March 31, 2021.
  • This allows an additional purchase capacity of approximately Rs 3.6 lakh crore for banks without worrying about fluctuation risks over this period.

Key Points:

-In order to reduce the cost of funds for banks, RBI allowed them to swap the funds raised under long term repo operations (LTRO) at 5.15% with the new funds made available under the Rs 1 trillion repo window at 4% (current repo rate).

– RBI is conducting market operations as required through a variety of instruments to ensure orderly market functioning to mitigate the impact of COVID-19 and restore the economy to a path of sustainable growth while preserving macroeconomic and financial stability.

10-yr govt bond yield down by 17 bps, lowest in 3 months

On September 1, 2020, RBI measures help bring 10-yr govt bond yield down by 17 bps, lowest in 3 months. The 10-year bond yield was trading at 5.944%, its steepest decline since 13 May, 2020 from its previous close of 6.117%. Bond yield and prices move in opposite directions.

What is OMO?

OMO is a part of “Operation Twist” to ease pressure evolving liquidity and market conditions. The main purpose of the OMO is to bring down the yields at the longer end.

What is Government Securities (G-Secs)?

A Government Security (G-Sec) is a tradeable instrument issued by the Central Government or the State Governments acknowledging the Government’s debt obligation. They consist of following:

  • Short term– usually called treasury bills, with original maturities of less than one year 
  • Long term– usually called Government bonds or dated securities with original maturity of one year or more

G-Secs carry practically no risk of default and, hence, are called risk-free gilt-edged instruments.

Recent Related News:

On August 25, 2020, Reserve Bank of India (RBI) announced a simultaneous purchase and sale of government securities (G-Secs) under open market operations (OMO) for an aggregate amount of Rs 20,000 crore in two equal tranches of Rs 10,000 crore on August 27, 2020 and September 03, 2020 on account of current and evolving liquidity and market conditions.

Static points about Reserve Bank of India (RBI):

-It was established on the recommendation of the Hilton Young Commission.

-RBI is responsible only for printing the currency notes. Minting of coins is done by the Government of India.

-Dr. Manmohan Singh is the only Prime Minister to have also served as the Governor of RBI.