RBI goes online to handle cash conditions discreetly
Jun 30 2014 , Mumbai
Using an electronic trading platform that gives RBI anonymity marks a departure from its usual open market operations and from the practices of other major central banks in Asia.
RBI had previously used open market operations to add or drain liquidity, a relatively public system that allowed traders to position themselves to try to profit from the central bank’s transactions.
“The whole idea is liquidity management should not influence long-term yields,” one of the officials said. “If you impound or provide liquidity through NDS-OM (the online platform), it will help in avoiding an impact on yields, which used to be there with the announcement of open market operations.”
He declined to be identified as he was not authorised to speak to the media.
RBI has sold Rs 4,385 crore ($730 million) of bonds in the three weeks starting May 29 through the electronic trading platform, known as the negotiated dealing system — order matching (NDS-OM), RBI data shows.
The amount bought was relatively small given that daily volumes on NDS-OM are around Rs 30,000 crore, but it marks the central bank’s most active use of the NDS-OM platform since June 2012. At that time, RBI bought bonds to infuse liquidity during a period of acute tightness in cash.
However, the official said RBI would not be able to completely switch to NDS-OM for all of its cash management, as the debt market is not deep enough for large-scale operations. Open market operations will still be an option, but RBI will avoid it as much as possible.
The use of NDS-OM was part of recommendations issued by an RBI panel in January on revamping the country’s monetary policy framework.
A RBI official said the bank would also use trading in the NSD-OM strategically to improve trading volumes across more bonds as opposed to a few securities.
“The idea is to buy or sell illiquid securities as much as possible to improve the volumes on these papers,” an official said.
While other major Asian economies have online bond trading, the central banks in those nations usually do not use the platform to manage banking system liquidity.
Many traders welcomed the central bank’s efforts to temper market volatility, but some said it may not be very effective. “It is a better way to manage liquidity but the process can get constrained if RBI wants to sell securities as only a few number of securities are actually traded on NDS-OM,” said Ashish Parthasarathy, treasurer at HDFC Bank.