* RBI aims to minimise impact on bond yields by being less
* Sells 43.85 bln rupees of bonds in 3 weeks via online
* Won't shift fully to online platform as bond volumes not
* Move seen constrained by limited securities being traded
(Adds comments and market reaction)
By Suvashree Dey Choudhury
MUMBAI, June 30 India's central bank has quietly
switched to using an electronic bond trading platform to manage
cash levels in the debt market, hoping a more discreet approach
will have less impact on bond yields, two officials familiar
with the trades told Reuters.
Using an electronic trading platform that gives the Reserve
Bank of India (RBI) anonymity marks a departure from its usual
open market operations and from the practices of other major
central banks in Asia.
The 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
"The whole idea is liquidity management should not influence
long-term yields," one of the officials told Reuters.
"If you impound or provide liquidity through NDS-OM, 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.
The central bank has sold a total 43.85 billion rupees ($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 300 billion rupees ($5 billion),
but it marks the central bank's most active use of the NDS-OM
platform since June 2012. At that time, the RBI bought bonds to
infuse liquidity during a period of acute tightness in cash.
However, the official said the central bank will not be able
to completely switch to NDS-OM for all of its cash management as
the Indian debt market is not deep enough for large scale
operations. Open market operations will still be an option but
the central bank will avoid it as much as possible.
The use of NDS-OM was part of recommendations issued by a
central bank panel in January on revamping the country's
monetary policy framework after the appointment of governor
Raghuram Rajan late last year.
The RBI did not immediately respond to questions from
Another official said the RBI would also use trading in the
NSD-OM strategically to improve trading volumes across more
bonds as opposed to a few securities.
Currently, trading is concentrated mostly on the 10-year
benchmark bond while the 6-year bond
is a far second in terms of volume.
"The idea is to buy or sell illiquid securities as much as
possible to improve the volumes on these papers," said the
While other major Asian economies such as Japan, South
Korea, and China have online bond trading, the central banks in
those countries 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 the 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.
Since taking the helm of the central bank in September,
Rajan has spearheaded substantial reforms in the country's debt
and money markets, including the introduction of term repos and
reverse repos to manage cash conditions.
Rajan has largely avoided open market operations, with the
central bank using it only three times in his nearly 10 months
in office to buy a total of 256 billion rupees of bonds from
October to January.
By contrast, the RBI under the previous governor Duvvuri
Subbarao bought bonds almost every two weeks during the last
fiscal year of his tenure.
(Additional reporting by Pete Sweeney in Shanghai, Choonsik Yoo
in Seoul and Hideyuki Sano in Tokyo; Editing by Jacqueline Wong)