RBI Needs Innovative Ways To Insulate Government's Borrowings Plan From Ukraine War Impact: SBI Report

The ongoing Russia-Ukraine war may hamper government's borrowing programme in the next fiscal as markets feel the jitters of the development, a report by State Bank of India (SBI) has said.

Authored by SBI's group chief economic adviser Soumya Kanti Ghosh, the report said that the Reserve Bank of India (RBI) can cushion the economic impact of the ongoing conflict on the borrowing plan by taking some innovative measures.

After the continuing mayhem in the market in the wake of the war, the government was quick to clarify that it is unlikely to borrow in March as the runaway crude prices have been pushing down US yields, which in turn pushed up domestic yields, leading to larger interest outgo on the government's close to Rs 81 lakh crore of outstanding debt.

Along with this, the RBI has a host of unconventional tools to manage government borrowings of over Rs 14.3 lakh crore in 2022-23 and it is important that the debt market understands such nuanced undertones and does not get into a frenzy as it is swirling currently with crude prices threatening to move beyond $120, Mr Ghosh said in the report.

According to him, the RBI could go ahead with the proposed borrowing by leveraging all plausible alternatives within the framework through a 'dumbbell' strategy, which is also known as a 'barbell' investment strategy. This involves buying a combination of bonds with short and long maturities to offer the flexibility of short-term bonds in addition to the generally higher yields associated with longer-term bonds.

Mr Ghosh suggested many steps, including conducting government securities (G-secs) auction twice a week instead of the present practice of weekly auctions, not front-loading the same by stretching it more or less equally across the four quarters and mixing short-term treasury-bills (T-bills) with medium and long terms issuances and government on its part giving a boost to small, savings among others.

The RBI should explore a higher share of T-bills in the borrowing spreadsheet across all three-time durations by mopping up considerable additional amount under the T-bills route in all weekly auctions without disturbing the equilibrium, with a band of Rs 1,500-2,500 crore higher accretion set per week, as the market appetite and liquidity conditions in sight, the SBI's economic adviser suggested.

The government may look to give a push to small savings schemes. In particular, it can give a hard push to the Sukanya Samriddhi Yojana (SSY) by encouraging fresh registrations in a mission mode, allowing one-time registrations for all leftover cases up to 12 years, he added.

The RBI can issue papers by matching the profile of redemption of government papers. Ideally, papers up to 7 years in the short term segment, 10-15 years in the mid-segment and beyond 15 years in the long term segment can be the ideal mix for meeting the borrowing appetite of market players, as per the report.