The Reserve Bank of India (RBI) on Monday announced measures, including two more tranches of ‘Operation Twist’ aggregating Rs 20,000 crore and term repo operations aggregating Rs 1 lakh crore in September, to cool the rising bond yields and assuage liquidity pressures that could arise due to advance tax outflows.

The central bank also created more room under the so-called ‘held to maturity’ (HTM) category, which Banks’ can utilise from September 1, 2020 to park their fresh G-Sec acquisitions. This move addresses their concerns about mark-to-market provisioning.

The aforementioned move on HTM is expected to encourage Banks to subscribe to G-Secs in the backdrop of enhanced borrowing programme of the Government and States.

 “Recently, market sentiment has been impacted by concerns relating to the inflation outlook and the fiscal situation amidst global developments that have firmed up yields abroad.

“...In order to continue to ensure orderly market conditions and congenial financial conditions, the following measures are being announced,” the RBI said.

The RBI said it will conduct additional special open market operation (OMO) involving simultaneous purchase and sale of G-Secs (‘Operation Twist’) for an aggregate amount of Rs 20,000 crore in two tranches -- September 10, 2020 and September 17, 2020 -- of Rs 10,000 crore each.

The central bank emphasised that it remains committed to conduct further such operations as warranted by market conditions.

The central bank had conducted a special OMO, entailing simultaneous purchase and sale of G-Sec for Rs 10,000 crores each, on August 27th. A similar special OMO would be conducted on September 03, 2020.

Term repo for Rs 1 lakh crore

The RBI said it will conduct term repo operations for an aggregate amount of Rs 1 lakh crore crore at floating rates (that is at the prevailing repo rate) in the middle of September to assuage pressures on the market on account of advance tax outflows. Repo entails infusion of liquidity into the banking system by RBI.

“In order to reduce the cost of funds, banks that had availed of funds under long-term repo operations (LTROs) may exercise an option of reversing these transactions before maturity.

“Thus, the banks may reduce their interest liability by returning funds taken at the repo rate prevailing at that time (5.15 per cent) and availing funds at the current repo rate of 4 per cent,” the central bank said in a statement.

HTM: More elbow room

The central bank created more elbow room for Banks’ to park freshly acquired G-Secs in the HTM bucket.

Currently, banks are required to maintain 18 per cent of their net demand and time liability (NDTL) or deposits in Statutory Liquidity Ratio (G-Sec and State Development Loan) or SLR securities.

The extant limit for investments that can be held in HTM category is 25 per cent of total investment. Banks are allowed to exceed this limit provided the excess is invested in SLR securities within an overall limit of 19.5 per cent of their deposits.

RBI observed that SLR securities held in HTM category by major banks amounted to around 17.3 per cent of their deposits at present. However, there are inter-bank variations with some banks close to the 19.5 per cent of their deposit limit.

“Accordingly, it has been decided to allow banks to hold fresh acquisitions of SLR securities acquired from September 1, 2020 under HTM up to an overall limit of 22 per cent of NDTL up to March 31, 2021 which shall be reviewed thereafter,” the central bank said.

The RBI assured the markets that it stands ready to conduct market operations as required through a variety of instruments so as to ensure orderly market functioning. In support of the accommodative stance of monetary policy, the RBI is committed to ensuring comfortable liquidity and financing conditions in the economy, it added.