RBI to purchase state government bonds through OMO

The central bank also increased the held-to-maturity limit of banks to 22% from 19.5% of net demand and time liabilities (NDTL). This, along with the inclusion of SLD in OMO, is expected to ease concerns about illiquidity and also support the state government borrowing programme.

RBI also rapped the bond market for demanding a higher return on sovereign papers, which led to the devolvement of recent government auctions. Das said that both market participants and the RBI should share the responsibility to ensure the orderly evolution of the yield curve. He also added while RBI stands ready to conduct market operations to assuage liquidity pressures, the bond market should be more cooperative.

RBI had declined to accept bids at government bond auctions for four consecutive times as it fought to cool benchmark yields, which have crossed 6%. While the government has assured that it will stick to the borrowing programme, the bond market is expecting additional borrowing in the fourth quarter.

Separately, the state governments are also expected to borrow as much as Rs2 trillion in Q3FY21, 33% higher than the actual amount of Rs1.5 trillion last year. This could result in increased SLD issuances in the fourth quarter as they scrabble for funds amid sharp contraction in their own tax collections and shortfall in GST compensation cess at Rs2.35 trillion.