The Reserve Bank of India said it will buy government bonds worth 10,000 crore from investors for the first time this fiscal, aiming to ease pressure on interest rates after three of the four bond sales this quarter did not have enough takers at the specified price.

The move to ease the pressure of excess demand for funds than what is available, may be militating against 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 may 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.

"Our projections show that liquidity is going to tighten further from here," said B Prasanna, MD and CEO, ICICI Securities Primary Dealership. "So this might be the first in the series of OMOs that RBI will undertake."

The central bank will buy unspecified bonds on November 24 in what is known as 'open market operations' (OMO). It last conducted such purchases on January 12 for an aggregate amount of 12,000 crore.

At least three bond sales devolved on primary dealers as investors demanded higher yields to buy India government bonds than what the Reserve Bank of India was willing to give. The central bank, which is also the debt manager of the government, declined. Fund availability in the system is also getting 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. The benchmark 10-year bonds ended at 8.88%, unchanged from the previous close.

This need not necessarily be an indicator of RBI's view on government bond yields, but only to avoid abnormal demand for funds. "RBI doesn't target yields," central bank deputy governor Subir Gokarn said recently. "Our objective is to manage liquidity and if we find that there is stress on liquidity, then we would take some action to ease that stress. This is not with the direct objective of targeting yields," he added.

Indeed, if the Reserve Bank keeps it measured, it may not fuel the prices much.

"This step should not be confused with RBI's anti-inflationary stance," said Samiran Chakraborty, head of India research, Standard Chartered Bank. "Ours is not a money supply-driven inflation. Money supply has only grown 16%. (Economic Times)