Raghuram Rajan's welcome party for new FM Arun Jaitley with robust forex chest

May 29 2014, 09:24 IST
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Finance Minister Arun Jaitley at a meeting with Raghuram Rajan, Governor of Reserve Bank of India in New Delhi. (PTI) Finance Minister Arun Jaitley at a meeting with Raghuram Rajan, Governor of Reserve Bank of India in New Delhi. (PTI)
SummaryReserve Bank's push for forex chest lowers debt cost for the government.

Reserve Bank of India Governor Raghuram Rajan has made out a welcome party for new finance minister Arun Jaitley in the money market.

The minister can borrow more from the market and still keep his fiscal house in order.

This has happened because of the robust foreign exchange mop up operations the RBI has begun in earnest since March this year.

As the bank has bought more dollars it has pushed in more rupees into the currency market. This has made banks build up deep pools of rupee or liquidity, which they have then invested in buying more government papers.

The higher demand for government securities has made their price rise and their interest cost or yields fall (the two move in opposite direction). The lower yields have lowered the costs for the government on the stock of debt they have sold in the markets.

With bond yields falling, liquidity improving and foreign exchange reserves rising in the last one month, it is a win-win scenario for both the RBI and the government.

“Yes yields have come down. The overall situation is reflective of the reality of a stable government, heavy FII inflows and even US Treasury bills have come down to 2.51 per cent. These factors are positive for the market,” said NS Venkatesh, chief general manager and head of treasury, IDBI Bank.

Thanks to the heavy inflows into the capital market, India’s forex reserves rose by close to $11 billion so far this fiscal year (2014-15) to around $ 315 billion. Foreign investors, who have been pumping in dollars, invested close to $ 4.5 billion in May in the equity and debt market on expectation of a strong and stable government under Narendra Modi.

Yields on government securities (benchmark 10 years) have fallen from around 8.78 per cent to 8.70 per cent, commercial deposit rates have dipped from 9.25 per cent to 9.00 per cent and those on corporate bonds have fallen from 9.50 per cent to 9.30 per cent.

“Short-term Treasury bills have fallen by 20 basis points. The overall decline in yields is around 25 basis points. To that extent, it will become cheaper for the government to borrow from the market,” said Krishnamoorthy Harihar, Treasurer, FirstRand Bank.

The market will see an auction of 14-year paper on Friday which, in normal course, should have carried an yield of 8.95 per cent. However, this should be available for 8.75 per cent

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