Mumbai: The surprise Rs 10,000 crore OMO announcement by the Reserve Bank yesterday is small low for a meaningful recovery in yields, says a report.
After the OMO announcement, the benchmark yields fell to 7.62 per cent from 7.73 per cent last Friday. Today it opened at 7.62 per cent and closed at 7.58 per cent. Since last November, the bond yields were on northward-ho gaining almost 70 bps.
The core liquidity in the system is currently at Rs 23,000 crore, lowest since November 2016. In June 2017, it was hovering around Rs 4,00,000 crore.
"The market is expecting more aggressive OMO /liquidity support on a more sustained basis to address any meaningful recovery in yields. An elevated yield is also inimical to policy transmission," an SBI Research said.
The RBI offered to purchase five securities– 8.12 per cent-2020, 6.84 per cent-2022, 7.72 per cent -2025, 6.79 per cent -2027 and 8.24 per cent -2033 later this week.
It said OMO purchase was inevitable as there has been a spate of devolvement in the last few auctions.
During FY18 total devolvement on primary dealers was around Rs 10,000 crore which was almost double the amount of FY17 devolvement.
In FY19 (till May), only five auctions had done and out of that Rs 5,000 crore has already devolved on PDs. "This is a disturbing sign and that need to be correct," it said.
The report listed out three main reasons for decline in liquidity in the system.
First, OMO sales in FY18 of Rs 90,000 crore perhaps spooked the market as the threshold OMO which the market could have absorbed given the demand supply of government papers was at Rs 40000 crore to Rs 50,000 crore at most.
Secondly, deposit growth at 6.7 per cent in FY18 is a 54-year low, which was due to the base effect post demonetisation and significant spurt in currency withdrawal.
Currency withdrawal by the public in April was at Rs 75,000 crore, 31 per cent higher than the trend growth before demonetization.
"We expect, a currency leakage of close to Rs 3 trillion or more in FY19, with flurry of state elections around the corner, culminating with the general elections," the report said.
The report further said, with rupee under pressure, RBI intervening in foreign exchange markets could also have an impact on liquidity, if there is a direct dollar sale.
"The decline in liquidity is a matter of concern, as it comes despite a redemption of government papers in April of Rs 71,400 crore. Meaningful redemption are now due only in February of Rs 53,000 crore," the report said.