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RBI to mop up Rs 6,000 cr via bond auction
March, 03rd 2007

The ides of March have come to haunt the bond market again. The Reserve Bank of India (RBI) has announced measures to mop-up liquidity, which money market dealers fear could erode the value of their bond portfolios.

RBI on Friday said that it would suck out an additional Rs 6,000 crore through the auction of 6.65% 09 bonds on March 6. This auction is part of RBI market stabilisation scheme (MSS) where the money raised is impounded with the central bank instead of being passed on to the government for spending.

The central bank said that this was keeping in mind capital inflows and the paramount importance given to liquidity management in containing inflation. The measures come on the back of reserves going up by over $16.5 billion in the first seven weeks of 2007.

While the bond market may live through the liquidity mop-up next week, they are dreading continuation of the market stablilisation scheme (MSS) into mid-March. By mid-March, the market would see outflows of over Rs 40,000 crore on account of advance tax payments. If the MSS were to continue bond prices would take a beating, said a dealer.

Simultaneously, RBI has reduced the size of an earlier announced auction by Rs 1,000 crore and has said that starting March 5, 2007, daily reverse repo absorption would be limited to a maximum of Rs 3,000 crore each day, comprising Rs 2,000 crore in the first liquidity adjust facility (LAF) and Rs 1,000 crore in the second LAF.

Some dealers feel that RBIs measures could be aimed at nudging banks that are on the verge of defaulting under the statutory liquidity ratio obligations (SLR) into buying bonds. Dealers say that given the pressure on liquidity some banks have been living on the edge by borrowing securities from RBI through LAF to meet their SLR obligations.

In a late night statement RBI said, On a review of the liquidity conditions, it has been decided that MSS will now use a mix of treasury bills and dated securities in a more flexible manner, keeping in view capital flows in the recent period, the assessment of volatility and durability of capital flows, and the paramount importance attached to liquidity management in containing inflation.

RBI would, subject to variations in liquidity, announce every Friday the possibility and the quantum of MSS issuances for the succeeding week. These announcements would cover issue of treasury bills and dated securities under MSS. Their auctions would be conducted in accordance with provisions of memorandum of understanding between the RBI and the government of India.

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