Mumbai: In a move that will ease the prevailing tight liquidity conditions in the banking system, the Reserve Bank of India on Friday said the Centre plans to buy back Rs 40,000 crore worth of government securities on May 9, the first such repurchase since 2018.
The unexpected move is also seen bringing down yields on short-term government bonds, as the three securities that the government has chosen to buy back are all maturing within six to nine months.
A fall in government bond yields brings down cost of borrowing for companies as pricing of corporate bonds is benchmarked to sovereign debt. A bulk of corporate borrowing is through short-term papers.
The bonds that the government has announced for buyback are the following – the 6.18%, 2024 paper, the 9.15%, 2024 paper and the 6.89%, 2025 paper.
“The offers for the auction should be submitted in electronic format on the Reserve Bank of India Core Banking Solution (E-Kuber) system on May 09, 2024 (Thursday) between 10:30 a.m. and 11:30 a.m. The result of the auction will be announced on the same day and settlement will take place on May 10, 2024 (Friday),” the RBI said.
A buyback of securities essentially means that the government is choosing to repay a portion of outstanding debt before the dates of actual maturity of its bonds. Given that banks are among the largest holders of government bonds, such buybacks release liquidity into the banking system.
As on May 2, liquidity in the banking system, as measured by banks’ borrowing from the RBI, was at a deficit of Rs 78,481.39 crore, latest central bank data showed.
In its role as the government’s debt manager, the RBI advises the Centre on steps such as buybacks and switches of government securities. Dealers said that the surprise step displayed the RBI’s commitment towards preventing sharp swings in banking system liquidity, which could affect cost of borrowing across the economy.
Dealers said while government spending had picked up from February to April, the pace of expenditure would likely be muted before the election results in June, thereby necessitating steps from the RBI to prevent banking system liquidity from dipping into large deficits.
