UPDATE 1 – India’s central bank announces new measures to maintain market stability

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(Updates with details)

By Swati Bhat

MUMBAI, Aug.31 (Reuters) – The Reserve Bank of India on Monday announced new measures to keep the financial system stable during the coronavirus pandemic, including two more tranches of open market bond special operations in its “ Operation Twist. ”

The central bank said it would also increase the ratio of securities banks can hold to maturity as part of their statutory liquidity ratio (SLR) or bond holding requirement, which would help limit losses due to market volatility.

“The RBI remains committed to using all the instruments at its disposal to revive the economy by maintaining favorable financial conditions, mitigate the impact of COVID-19 and return the economy to a path of sustainable growth while preserving the macroeconomic and financial stability, “the central bank said in a statement.

RBI said it would conduct two more tranches of 100 billion rupees ($ 1.36 billion) each of simultaneous sale and purchase of bonds in September, or “Operation Twist” as it is commonly known.

Indian bond yields had risen in recent weeks amid high government borrowing, rising inflation and lower expectations of interest rate cuts following the release of the last minutes. RBI Monetary Policy Committee meeting.

Some analysts, however, said the RBI’s measures did not go far enough.

“It’s a band-aid for the market, but the steps also show that RBI doesn’t have space for OMOs (open market operations),” said A. Prasanna, chief economist at ICICI Securities Primary Dealership .

RBI, however, also said there were indications that food and fuel prices were stabilizing and that the recent rise in the rupee was helping to contain imported inflationary pressures.

The bank said it would also conduct forward repo transactions totaling Rs 1 trillion at the current repo rate in mid-September to ease the pressures of early tax outflows.

“This move does not remove the problem of oversupply, the impact of this move (keeping bond yields in check) will only be temporary,” said Ashhish Vaidya, Head of Trading and Asset Management liabilities at DBS Bank India.

“What the market needs, due to the bond supply overhang, is some sort of decisive decision in terms of GMO purchases, as what central banks in developed markets have demonstrated.”

RBI said banks would now be allowed to hold up to 22% of their SLR securities in the held-to-maturity category through March 31, 2021, up from the current limit of 19.5%.

($ 1 = 73.3320 Indian rupees)

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