Bond buybacks to boost G-sec mkt

Written by Sunny Verma | New Delhi | Updated: May 4 2012, 07:32am hrs
RBI also plans to reduce G-sec portfolio of banks in the held-to-maturity category to boost liquidity

The Reserve Bank of India (RBI) and the finance ministry are set to consolidate the government securities (G-sec) market through buybacks. Simultaneously, the central bank is considering reducing the G-sec portfolio of banks in the held-to-maturity category to lift trading. These measures are aimed at improving liquidity and trading volumes in the G-sec market, officials familiar with the matter said.

The RBI has already initiated selective buybacks of government bonds that account for a miniscule chunk of the total outstanding government debt paper, a senior official said. "Currently, there are numerous debt papers of varying maturities where outstanding component is less than R2,000 crore. As not much trading happens in these papers, the government is planning consolidate these," the official said.

This consolidation would result in fewer securities with large outstanding, which would boost trading activity over time. Currently, less than 1% of the total outstanding government debt paper is traded on daily basis in the G-sec market, with the highest trading volumes being recorded in the benchmark 10-year government paper. A committee, headed by RBI executive director R Gandhi, is working on these lines to suggest ways to improve liquidity in the G-sec as well as interest rate derivatives market. A total of R16,309-crore worth of government debt papers were traded on Thursday, and trading in 10-year paper accounted for nearly 10% of the total trading volume, according to the Clearing Corporation of India data. Total outstanding government debt paper were R28.62 lakh crore as on March 31, 2012, as per the latest available data.

These measures will aid the government's borrowing of R5.7 lakh crore this fiscal by cooling off the the yields on government bonds, officials said. This would reduce the Centre's borrowing costs, which increased by 4 basis points in the January-March 2012 over the same quarter previous fiscal.

The official said the RBI and the finance ministry are also in discussion over whether banks should be mandated to hold a larger portion of bonds in the held-for-trading (HFT) segment, shifting from the HTM category. "When bonds are held in the HTM category, there is really no incentive for banks to trade in these. There is a thinking that a larger portion of government bonds should be in the trading segment," the official said.