The bond market will be closely watching the Reserve Bank of India’s (RBI) buyback of securities worth Rs. 60,000 crore on behalf of the government on Tuesday, as the two previous buybacks this month did not achieve the desired results.
With banks offering to sell bonds at higher prices — or lower yields — the RBI rejected most of the bids in the previous two auctions, accepting bids worth only `12,583 crore out of a total notified amount of Rs. 1 trillion.
The RBI is looking to inject funds into the banking system, which is experiencing tight liquidity due to low spending by the government. Low spending due to the ongoing national election has led to a build-up in the government’s cash balances and a subsequent cash deficit in the banking system. Liquidity deficit is expected to widen further in the next few days as there is an outflow of goods and services taxes.
Experts expect banks to bid aggressively at higher prices in Tuesday’s auction and will be closely watching the RBI’s response to these bids.
“The market will again try to get another 3-4 basis points better than the prevailing yields. The bids are likely to be aggressive, they may ask for lower yields,” Vikas Goel, managing director and CEO at PNB Gilts, told FE. “If the bidding is too aggressive, the government is unlikely to accept the bids,” he added. Bond prices and yields move inversely.
Cash balances with the government have been estimated to have increased to Rs. 2.4 trillion.
Regarding the auction scheduled on Tuesday, the RBI has said the government retains the discretion to decide the quantum of buyback of individual securities and to accept more or less than the notified amount of `60,000 crore. Four securities offered to be bought back include 7.35% GS 2024 and 8.40% GS 2024 maturing on June 22 and July 28, respectively. Further, 9.15% GS 2024 that will mature on November 14 and floating rate bonds (FRB) 2024 maturing on November 7, are on the list.