The Reserve Bank of India decided to buy government bonds worth 10,000 crore from investors for the first time in the 2011-12 fiscal. The decision was taken with an objected to ease pressure on interest rates after three of the four bond sales in the July-September quarter did not have enough takers at the specified price.
The central bank will buy unspecified bonds on 24 November 2011 in what is known as 'open market operations' (OMO). It last conducted such purchases on 12 January 2011for an aggregate amount of 12000 crore.
The move to ease the pressure of excess demand for funds than what is available, will however contradict the central bank's anti-inflationary stance as more funds in the market add to demand, fuelling price rise.
This may not be the first such injection of funds into the system by RBI to temper the government's borrowing costs as the treasury will raise the borrowing target again as revenue growth falters. The government raised borrowing target in the second half to 2.2 lakh crore from 1.67 lakh crore forecast in February 2011.
Fund availability in the system is tight with banks borrowing more than 1 lakh crore from the central bank's liquidity facility. Hence, release of 10,000 crore will ease pressure on interest rates.
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