Government To Buy Back Sovereign Bonds Worth Rs 40,000 Crore
This comes as the liquidity in the banking system has remained in deficit for a prolonged period.
In a surprise move, the Reserve Bank of India has announced a buyback of government securities worth Rs 40,000 crore on May 9, it said in a press release on Friday.
The securities offered for buyback are 6.18% GS 2024, 9.15% GS 2024 and 6.89% GS 2025, maturing on Nov. 4, Nov. 14, and Jan. 16, respectively.
This comes as the liquidity in the banking system has remained in deficit for a prolonged period. On Thursday, the liquidity was in deficit of Rs 78,481 crore, as compared with a surplus of Rs 78,422 crore at the beginning of April. It was in a deficit of Rs 2.3 lakh crore at the end of January.
Fixed income traders and economists have been pinning their hopes on government spending to pick-up in the coming months, which could provide comfort to lenders on the liquidity front on a durable basis.
Although core liquidity in the banking system remains in surplus, due to the government's high cash balances with RBI, this buyback of securities may not help much as these securities were already due for maturity in the near-term.
"This looks like a redistribution of liquidity plan with the government having greater visibility of the near-term liquidity," said Vivek Kumar, economist at QuantEco Research.
"Another interpretation could be that it is an yield signal for the market. While it may have a mild calming knee-jerk influence (on yields), the impact won't be durable as this does not amount to a fresh injection of core liquidity for the year," Kumar said.
The central bank also said that there is no notified amount for the individual securities. The settlement of the auction to be held on May 9 will take place on May 10, the RBI said.
Going ahead, traders expect the yield on short-term securities to inch lower.
This comes as a surprise for market players as the RBI has been assuring management of liquidity conditions through its main and fine-tuning operations in both repo and reverse repo auctions over the last few months. A buyback of securities was not anticipated.
RBI Governor Shaktikanta Das, in his monetary policy address on April 5, had said that the central bank will "remain nimble and flexible" in its liquidity management.
Between February-March, 14 fine-tuning variable rate repo operations of 1-7 days maturity were conducted, amounting to Rs 8 lakh crore, of which six fine-tuning variable rate repo operations were conducted cumulatively, injecting Rs 3.9 lakh crore in the second half of March.
During February-March, four main operations cumulatively injected Rs 3.5 lakh crore into the system.
"We will deploy an appropriate mix of instruments to modulate both frictional and durable liquidity, so as to ensure that money market interest rates evolve in an orderly manner that preserves financial stability," Das had said.
