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Reserve Bank of India's Open Market Operations Plan Surprises Market

2023-10-07 14:59:54.892000

The Reserve Bank of India's surprise announcement of its open market operations plan has created uncertainty in the market. The central bank did not reveal a specific timeline for the proposal, leading to a rise in the yield on benchmark 10-year government bonds. The market expects the open market operations to take place soon, which is likely to tighten liquidity in the system. The Reserve Bank of India uses open market operations to adjust the liquidity conditions of the rupee in the market. When there is excess liquidity, the central bank sells government securities to absorb the rupee's liquidity, which can lead to a spike in bond yields. The RBI Governor's indication of a preference for active liquidity management, influenced by inflation risks and financial stability concerns, adds to the surprise of the announcement. The mention of an open market operation sale at this stage was unexpected and leaves room for speculation on the level and quantity of liquidity the RBI plans to sell. The RBI could opt to auction open market operation sales of government securities to mop up excess liquidity. Systemic liquidity has remained within deficit due to quarterly tax outflows and GST payments, despite the gradual withdrawal of the Incremental Cash Reserve Ratio. Higher government spending and the withdrawal of the Incremental Cash Reserve Ratio could increase systemic liquidity, but higher demand for currency ahead of the holiday season could negate any increase in liquidity. [e8fccdf1] [7abc1a45] [e5e20417]

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