RBI to continue OMOs in rest of the fiscal

The Reserve Bank of India (RBI) said on Tuesday that it would continue with its open market operations (OMOs) in the second half of the current fiscal as and when necessary. The apex bank said that during first half of the fiscal, it had purchased government securities worth about Rs 50,000 crore.

Under the open market operations the apex bank can buy old government securities held by banks or other financial institutions that help keeping the liquidity sufficient in the system in order to support the heavy sovereign debt hitting the markets this fiscal.

Indian government is running a 16 year record high fiscal deficit of 6.8% and has targeted borrowings of Rs 4.51 lakh crore to meet the revenue-expenditure gap. However, such a high level of sovereign borrowing can hinder the supply of credit to the private sector thus ‘crowding out’ private investment. To avoid such a possibility, the RBI uses its OMOs to ensure that there is sufficient liquidity maintained in the system for supporting both the government’s as well as private sector’s borrowing needs.

Meanwhile, the central bank has deferred the decision of banks to raise the ‘held to maturity’ (HTM) cap which was also under consideration after yesterday’s meeting between RBI and finance ministry. Most of the banks have indicated that they have or are reaching their held to maturity cap of 25%. Although RBI had earlier indicated that it would consider increasing the banks’ cap by 2 –3%, no decision has been taken on it.