The Reserve Bank of India has announced an open market operation (OMO) purchase of government securities worth Rs 12,000 crore on March 3. The RBI conducts OMO purchases in order to infuse liquidity into the system whenever there is a deficiency, while it conducts OMO sales to suck excess liquidity from the system. OMOs are also intended to keep the short-term interest rates close to the policy rate.

The liquidity deficit in the banking system has been around Rs.1.5 trillion over the past two months, mainly because of the build-up of the government’s cash balance with RBI. The central bank’s foreign exchange interventions in the recent past have also increased the deficit. Banks’ borrowings from the various repo tenders of the RBI have risen to Rs.1.8 trillion as of 24 February from an average of Rs.1.4 trillion in January.

This deficit is expected to increase in March due to tax outflows and an uptick of loan disbursals. The last month of a fiscal year typically sees liquidity deficits rising. RBI restarted its bond purchases under OMO in December and has since then bought an aggregate Rs.30,000 crore from the market.

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