RBI Announces New Measures To Maintain Market Stability

MUMBAI: The Reserve Bank of India announced new measures on Monday to maintain stability in the financial system during the coronavirus pandemic, including two more tranches of special open market bond operations in its ‘Operation Twist’.

The central bank said it would also raise the ratio of securities that banks can hold until maturity within their statutory liquidity ratio (SLR) or mandatory bond holding requirement, which would help limit losses due to market volatility.

“The RBI remains committed to use all instruments at its command to revive the economy by maintaining congenial financial conditions, mitigate the impact of COVID-19 and restore the economy to a path of sustainable growth while preserving macroeconomic and financial stability,” the central bank said in a statement.

RBI said it will conduct two more tranches of 100 billion rupees ($1.36 billion) each of simultaneous sale and purchase of bonds in September, or ‘Operation Twist’ as it is popularly known.

Indian bond yields had risen in recent weeks due to high government borrowing, rising inflation and reduced expectations of interest rate cuts following the release of minutes of the RBI’s monetary policy committee’s latest meeting.

Some analysts, however, said the RBI’s measures did not go far enough.

“It’s a band aid for the market but the steps also show RBI doesn’t have space for outright OMOs (open market operations),” said A. Prasanna, chief economist at ICICI Securities Primary Dealership.

RBI, however, also said there were indications that food and fuel prices were stabilising and the recent rise in the rupee was helping to contain imported inflationary pressures.

The bank said that it will also conduct term repo operations for a total of 1 trillion rupees at the current repo rate in mid-September to assuage pressures from advance tax outflows.

“This move does not take away the problem of supply overhang, the impact of this move in (keeping bond yields in check) will only be temporary,” said Ashhish Vaidya, Head of Trading and Asset Liability Management at DBS Bank India.

“What the market requires, due to the bond supply overhang, is some sort of decisive move in terms of OMO purchases, like what the central banks in developed markets have demonstrated.”

RBI said banks would now be allowed to hold up to 22% of their SLR securities under the held-to-maturity category until March 31, 2021, up from the current limit of 19.5%.

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