RBI to conduct OMO purchase worth USD 40 billion? Here's what Bank of America Merryl Lynch says

Reserve Bank of India (RBI) is likely to conduct additional open market operation (OMO) purchase worth USD 40 billion by March end.

The RBI is delaying OMO, as it fears that this will signal weaker rupee. Image: PTI

Reserve Bank of India (RBI) is likely to conduct additional open market operation (OMO) purchase worth USD 40 billion by March end to provide durable liquidity and contain rising government bond yields, says a report.

Last week, the central bank had conducted one OMO worth Rs 10,000 crore and announced a similar amount of OMO purchase this week.

"We continue to expect the RBI to issue an OMO calendar that will assure durable liquidity, contain rising yields, reverse FPI outflows and stabilise rupee," Bank of America Merrill Lynch said in a report.

The report said OMOs should attract debt FPIs who can then reap potential capital gains which would help stabilise rupee. The RBI will also then be able to avert a liquidity crunch with growth set to slow after October with base effects fading.

The RBI, however, is delaying OMO, as it fears that this will signal weaker rupee and discourage debt FPIs, the report said.

"It (RBI) likely fears markets could see an infusion of rupee liquidity as a policy preference for a weaker rupee undermining its 4 per cent CPI target. We estimate one per cent depreciation impacts inflation by 20 basis points," the report said.

If FPI flows do not revive, the RBI will need to OMO an even larger USD 50 billion by March, it added.

The central bank has been intervening into the foreign exchange market to check rupee volatility.

Bankers also expect the apex bank to raise repo rate by 25 basis points in the upcoming monetary policy review.

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