India's central bank, the Reserve Bank of India (RBI) has started buying government bonds from the market this week because it believes that the pressure on liquidity could remain for longer than expected.
Subir Gokarn, a deputy governor of RBI said that the central bank is aware of the volatility in the foreign exchange markets and has tools to control the situation. The liquidity shortfall has remained at a level that is more than double of what RBI considers conformable.
The liquidity has remained low even after the central bank reduced reserve requirements in January and allowed more flexibility on borrowing through a marginal standing facility. The central bank opened its debt purchases through open market operations after it announced its intention to buy government bonds worth up to 120 billion rupees from the secondary market.
The RBI will aim at halting the fall in the value of the rupee by market intervention and measures to attract dollars. The country's currency has seen a drastic fall in its value in recent months as it fell from the level of about 48 against the dollar to about 53, recording a fall of about 10 per cent. It is believed that the recent fall in value is due to low risk appetite of the investors in the global markets and surge in dollar demand from Indian importers, and S&P's downgrade of India's sovereign rating outlook.
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