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Economy

Yet Another OMO?

The RBI is buying bonds yet again! In an effort to push even more money down our gullets – despite having expanded their balance sheet at an average of 16% per year in the 15 years – the RBI will conduct Open Market Operations (OMOs) to pump rupees into the system.

OMOs are auctions where banks can sell bonds to the RBI who will print money and give it to them in return. The bonds are carried as assets on RBI’s balance sheet, the money printed is a liability.

I don’t get why this is even remotely necessary. Bond yields in the market don’t indicate a lack of liquidity. There isn’t any “stretch” in the overnight markets, repo, call or anything. Adding 7,000 cr. – a small amount but this stuff adds up – seems unnecessary.

They’re telling us that the OMO of 7,000 cr. on friday is “consistent with the stance of monetary policy and based on the current assessment of prevailing and evolving liquidity conditions”. This can only mean two things:

  • The recent massive drop in the Rupee was stemmed by RBI selling dollars (or at least partially offset by it). When the RBI sells dollars, it buys rupees which technically go out of circulation. The RBI is trying to get those rupees back in. [This is a bad idea. The excess liquidity created in the past, when RBI printed rupees to buy dollars, has caused inflation. Taking those rupees out now, when the dollars go out, is very important to keep the system sane.]

 

  • The RBI is trying to help the sale of government bonds this week. There are three auctions: 1,000 cr. of Inflation Indexed Bonds and 3,600 cr. of State Government Bonds on Tuesday, and then 14,000 cr. of Central Govt bonds on Friday. The 18,600 cr. of auctions must be causing jitters – and they are infusing liquidity to avoid any “undersubscription” . [If true, this is just RBI financing the deficit. If borrowings are too much, then yields should go up – people will buy at higher yields. The RBI shouldn’t try to fulfil its role as a merchant banker for the government by bad monetary policy. This is why I say we need to remove this conflict and Cut up the RBI]

I’m very disappointed in this move, because it reflects short term thinking. RBI is basically taking my children’s future away by doing silly things to shore up the today and ruining our tomorrows.

I don’t expect anyone to care. I’m just shouting from this little rooftop.

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  • Ramamurthy says:

    Can a retail investor in the Bonds of Mutual Fund make money oit if this please?If so how?

    • Of course. Assume the 10 year bond yield drops to 6.5% from the 7.4% it is at this year. The drop in yield will result in a drop in the IIB yield by 0.6% (assume). That drop results in a profit as prices will go up to reflect that.