Open Market Operations

The Deposits of State Bank of India closed for subscription on November 6, 2011. The scheme expected to mobilise around $4-5 billion has undoubtedly been a resounding success. The total collections are reported to be over $5.5 billion, thereby exceeding the figure of $4.23 billion collected under Resurgent Bond scheme. The MID was the third sovereign bond floated over the last decade.

The first in the series was Development Bond floated in 1991 to mop up dollar funds in a bid to tide over the serious balance of payments crisis. Similarly, the purpose of RIB was to mitigate the pressures of financing the mounting trade deficit against the backdrop of post economic sanctions scenario. This time, again, the scheme was aimed at increasing the forex reserves against the backdrop of weak rupee and the burgeoning oil import bill.

In the government securities market, the higher collections under IMD scheme has given a big boost to the market. With expectation of good inflow coming into the market, players built up positions at the longer end. RBI also conducted the price based auction of 11.99 percent GOI 2009 on November 6, the closure date for IMD. 224 bids worth Rs 9037 crore were received against the notified amount of Rs 3000 crore.

Similarly, the cut-off yield at the auction was below the market expectation. This resulted in appreciation of prices at the longer end with yields falling. 11.40 percent GOI 2008, 11.99 percent GOI 2009, 11.30 percent GOI 2010 and 11.03 percent GOI 2012 were the most traded securities. In view of good subscription at the auction and the underlying sentiments in the market, RBI placed three securities viz. 11.75 percent GOI2006, 11.90 percent GOI 2007and 11.43 percent GOI 2015 in its OMO sale window at a price higher than the prevailing market price of the securities.

Continuing with its sterilization move, RBI for the first time placed 11.19 percent GOI 2005 in its OMO sale for an amount of Rs 3500 crore at a price to be decided through auction basis. Having created demand for longer tenor, RBI also conducted another auction of 11.03 percent GOI 2012 for a notified amount of Rs 4000 crore on November 13. The paper has been amongst one of the most traded paper at the longer term.

The paper was again fully subscribed at a cut-off yield of 11.50 percent, a fall of 20 basis points from the cut-off of 11.70 percent on October 25. Even after the auction,the yields on the paper fell. At the shorter end too, the cut-off yield at 364 day treasury bill auctions declined successively to 10.15 percent. In fact, the entire yield curve has shifted downwards in the past fortnight. The fortnight has thus been marked by massive sterilization operations by RBI through Open Market Operations sale of securities and also two auctions.

This resulted in an outflow of around Rs 18000 crore from the system. Inflows in the system were around Rs 2000 crore only resulting in temporary mismatch in demand and supply of funds. RBI, however, continued to inject funds through reverse repo at 10 percent so as to cap the call money rates. Government has so far completed 75 percent of its budgeted borrowing.

With IMD inflows expected to enter the system within 10-15 days, the undertone of the market continues to be bullish. Besides adding on to liquidity, it will also lend stability to the exchange rate. Credit to commercial sector is not picking up. With forex reserves of around $40 billion, RBI would be in a better position to meet the burgeoning oil import bill. Inflation has started tapering off and with reduced level of monetisation, it is no longer a cause of concern.

Oil prices have also started coming down and once winter is over, it is likely to break down further. With slowing down of the US economy, prognosis for US rates is also benign. Under these circumstances the possibility of any further pressure on interest rates is not likely. To look it is more helpful information about finance.