Flush with liquidity, RBI is quietly buying bonds from the open market

Topics Reserve Bank of India | RBI | Bonds

Debt market experts say the central bank buys bonds unannounced to replenish its own stock
At a time when the banking system is flushed with liquidity, the Reserve Bank of India (RBI) is buying bonds from the secondary market on a regular basis — unannounced.

On Tuesday, banks parked Rs 3.05 trillion of excess money with the central bank, highest since the demonetisation days. To support this mammoth liquidity operation, the central bank needs bonds. These bonds are given to banks as collateral against their cash. The RBI’s bond holding at the end of June this year was about Rs 9.9 trillion. This is because in the financial year 2018-19 (FY19), the RBI did massive bond purchases of up to Rs 3 trillion to infuse liquidity into the banking system.

However, as banks seem to be keeping the entire money back with the RBI because of a lack of opportunity in deploying the funds for credit, the RBI’s bond reserve may have been stretched, say bond market experts.

Till November 22, the central bank bought Rs 4,300 crore of bonds. In October, it had only bought Rs 35 crore worth of bonds, while in September, the bonds purchase was to the tune of Rs 755 crore. Considering that the announced bond purchases by the central bank run in trillions, buying bonds at a small scale doesn’t matter to the market, but it can for the central bank. 

Debt market experts say the central bank buys bonds unannounced to replenish its own stock, or to manage yields in its portfolio. Or, there could be redemption of bonds that the central bank held previously. It could be filling its kitty with the bonds already redeemed, or scheduled for it.

While this is not yield management as such, but illiquid bonds, if bought in bulk, could boost the prices of those bonds.

Yet, nobody knows what bonds the RBI holds, and in which securities the transactions have happened. The RBI does not publish details of those purchases, unlike when it announces secondary market bond purchases through official communique.



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