RBI has fight on its hands in managing govt’s borrowing

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SummaryIf the results of the latest auction of government bonds are anything to go by, managing the central government’s market borrowing during October-March could pose a challenge to the Reserve Bank of India.

If the results of the latest auction of government bonds are anything to go by, managing the central government’s market borrowing during October-March could pose a challenge to the Reserve Bank of India.

Of the R15,000-crore bonds auctioned, RBI had to devolve R4,029-crore bonds on primary dealers because of tepid demand. In fact, the most liquid 10-year benchmark 7.16%, 2023, bond was also devolved on PDs for R992 crore.

The government will borrow R14,000 crore next week through an auction, which will be the last in the borrowing calendar of April-September. During October-March, the government will borrow R2.35 lakh crore from the bond market, keeping the budgeted target of market borrowing at R5.79 lakh crore, according to a release from RBI.

However, in the Union Budget, it was said the government will buy short-term bonds and issue long-term bonds for a total of R50,000 crore. RBI did not mention any detail about this R50,000-crore borrowing.

Bond traders fear this so-called switch may turn out to be just an extra borrowing by the government. Such fears pushed the benchmark 10-year 7.16%, 2023, bond ended at a near one-month high yield of 8.85% on Monday, 30 basis points higher than Friday. “There is a fear that some extra borrowing may be done by the government going by the fiscal situation,” said a senior bond trader at a primary dealership.

The R2.35 lakh crore borrowing could mean a weekly supply of R15,000-crore bonds into the market, according to an RBI release.

“The second half of the year is a busy season for credit offtake. It will be increasingly difficult for bond auctions to get through,” said a dealer at a private bank.

Tight liquidity and a likely pick up in credit offtake once the busy festive season kicks in could reduce demand for government bonds and thereby drive up yields further, dealers said.

Banks have been borrowing nearly R1 lakh crore on an average from RBI’s Marginal Standing Facility despite the rate being as high as 9.50%. RBI had slashed MSF rate to 9.50% from 10.25% last week.

Banks’ credit growth has risen sharply to 18% year-on-year by September from 14% until August. As banks meet incremental corporate credit, their propensity to buy more government bonds gets reduced, dealers said.

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