MUMBAI, Dec 25: The Reserve Bank of India converted Rs 20,000 crore worth of special securities in its portfolio into marketable lots of varying maturities and coupon rates in 1996-97.

The RBI's open market operations got active in 1996-97 following the sudden increase in the liquidity of the system and its decision to control domestic interest rates and exchange rate mainly through this route.

Outright sale of securities and repo activities of the central bank gained importance due to the exigency of sterilising excess liquidity in the system following large capital flows last year, according to the report.

The extent of increase in the apex bank's outright sale of securities and repos is visible in the fact that during 1996-97, the net sale of government securities rose to Rs 10,464 crore as against a net purchase of Rs 514 crore in 1995-96.

The repo auctions were resumed by RBI in November 1996, after the surge in liquidity in the second half of 1996-97 and continued on a regular basis since January 1997.

Between November 1996 and March 1997, bids accepted in repo auctions range between Rs 300 crore and Rs 4,194 crore with cut-off repo rate emerging in the range of 4.00 to 5.48 per cent for 3 to 4 days durations.

"Persistence of excess liquidity in the system continued during the first half of 1997-98 as well, bringing the imperative of mopping up excess liquidity through active open market operations in the sharp focus," says the report.

The net sales of securities during the first half of 1997-98 aggregated Rs 2,063 crore as against Rs 1,306 crore during the corresponding period the previous year. The repo auctions were undertaken althrough for a period of 3 to 5 days with volume of repo transactions exceeding Rs 2000 crore during most of the auctions.

The cut-off repo rate after staying at 5 per cent at the beginning of April 1997 touched a low of 2.40 per cent by the end of the month. By end-September 1997, the repo rate was at 4.35 per cent, 60 basis points below the rate emerging on the 14-day Treasury bills auction.

During 1996-97, primary dealers bid for substantially higher amounts at Rs 24,230 crore and Rs 9275 crore in Tresury bills and Government dated securities respectively, as against a nominal target of Rs 4,110 crore in T-bills and Rs 2570 crore in dated government securities. The PDs purchased a total of Rs 12,467 crore worth of T-bills and Rs 7528 crore worth of government dated securities. The aggregate turnover in government securities market through SGL transactions during 1996-97 was at Rs 122942 crore. Such big volumes were made possible because of the surplus liquidity in the system, says the report.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.