Liquidity Push: RBI announces Rs. 2 Lakh crore Bond

SYNOPSIS

The RBI has announced a ₹2 lakh crore bond purchase programme to ease liquidity stress in the banking system. The move aims to align short-term interest rates within the policy corridor and support credit flow. It has helped improve market confidence and led to a decline in government bond yields.

Reserve Bank of India’s ₹2 lakh crore bond-buying and dollar swap plan is a targeted liquidity boost to ease banking stress, stabilize interest rates, and support smoother credit flow in the economy.

Reserve Bank of India (RBI) has unveiled one of the key liquidity support programs, which includes intending to buy government bonds to a value of ₹2 lakh crore. This action shows how the RBI is trying to bring sufficient liquidity in the banking system and stability in financial markets. The measure is meant to help in facilitating the flow of credit and confidence in the economy at a time when liquidity has been constrained by outflows of taxes and the season.

The heart of such strategy is massive Open Market Operations (OMOs) by which the RBI would purchase government securities of a value of 2 lakh crore in stages. Such purchases will be done in tranches in the next few months. This has been accompanied by the RBI declaring a 10 billion dollar swap auction, which will assist in pouring long lasting liquidity in the banking system. All these measures are aimed at relieving banks and enhancing the liquidity situation.

The liquidity stress was now present because of advance tax payments, increase in government cash balances and the interventions that the RBI had made in the foreign exchange market. This drove the short term interest rates higher than the policy rate causing pressure in money markets. The RBI intends to use bond purchases and swap operations to bring the short term rates into the policy range and make sure that there is efficient transmission of the monetary policy and also allow the banks to meet the credit demand as efficiently as possible.

The announcement has already positively affected the bond market. The yield of the government bonds went down especially in the longer term living areas. According to analysts, by reducing the supply of ultra-long-term bonds, this can be used to make the G-Sec yield curve flatter over the medium term. This alignment implies better expectations of the interest rates and inflation which favors the investors and borrowers.

All in all, the liquidity push also illuminates the use of various instruments by central banks to ensure financial stability. Bond purchases in the money market by the RBI increase liquidity and absorb surplus government borrowings indirectly aiding the fiscal management. The 2 lakh crore bond scheme is a very opportune and measured intervention to harmonize the situation of the liquidity to the overall economic goals.

PURVA BADGUJAR