RBI conducts first-ever OMO in state bonds, buys Rs 10,000 cr under scheme

The OMOs in SDLs are a special case this year, but could become the norm going forward if the markets are enthusiastic enough to trade the papers in the secondary markets.
The Reserve Bank of India (RBI) conducted the first open market operation (OMO) in state development loans (SDLs) on Thursday, buying Rs 10,000 crore of securities under the scheme.  

SDL holders offered Rs 15,475 crore of bonds against the OMO size of Rs 10,000 crore. The lowest cut-off yield was offered for Karnataka’s 9-year bond at 6.4746 per cent, while the highest cut-off was for Jammu Kashmir’s 10-year SDL at 6.6813 per cent. Overall, two papers each of 15 states were purchased in the OMO.  

The OMOs in state bonds are aimed at keeping the borrowing cost low for states, and bringing them closer to the Centre’s, but also to free up some of the bank balance sheets in favour of the RBI’s. Otherwise, the central bank does not hold SDLs in its balance sheets other than for accepting the sub-national papers for daily liquidity operations.  

The OMOs in SDLs are a special case this year, but could become the norm going forward if the markets are enthusiastic enough to trade the papers in the secondary markets, say experts.

States are now trying to minimise their bond issues and are clubbing the borrowing needs by re-issuing papers used earlier. This helps in secondary markets trading and the central bank can then chip in with more OMOs in SDLs in the future.  

Separately, the RBI on Thursday announced Rs 20,000 crore of OMO purchase of central government bonds. The OMO purchase will be done in bonds maturing between 2025 and 2032.

This is the second outright OMO purchase of central bonds that the RBI will conduct this fiscal year. In the last auction, the RBI had purchased Rs 20,000 crore of bonds. The RBI doubled the size of OMO auctions on October 9 monetary policy.  Yields on the 10-year bond closed at 5.9149 per cent, flat from its previous close.  




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