The Government’s attempt to infuse liquidity through a bond buyback on Tuesday failed again —the third in a row this month — as the Reserve Bank of India (RBI) rejected most of the bids.
The RBI, acting on behalf of the government, accepted bids worth Rs. 5,266 crore at the auction, just 8.7% of the notified amount of Rs. 60,000 crore. The response from the banks was also tepid as the central bank received offers worth Rs. 19,279 crore. In the three buybacks conducted this month, the RBI has managed to repurchase bonds worth only Rs.17,849 crore, significantly falling short of the Rs. 1.6 trillion target.
“The market participants offered Rs. 19,279 crore at the auction, which is less than a third of the notified amount, because they knew from the previous two auctions that the government is reluctant to accept bids above prevailing levels,” Vikas Goel, managing director and CEO at PNB Gilts, told FE.
In the buyback on May 9, the RBI repurchased government bonds worth nearly Rs. 10,513 crore against the notified amount of Rs. 40,000 crore. In the second buyback on May 16, it accepted bids worth Rs. 2069.99 crore against the notified amount of Rs. 60,000 crore.
The central bank aims to inject funds into the banking system, which is experiencing tight liquidity due to low government spending. Low spending due to the ongoing elections has led to a build-up in the government’s cash balances and a subsequent cash deficit in the banking system.
Government cash balance as on May 10 increased to Rs. 2.6 trillion from Rs. 2.2 trillion in the previous week. Liquidity deficit is expected to widen further in the next few days as there is an outflow of goods and services taxes.
“This week, we expect liquidity conditions to tighten further led by outflows from GST collections. However, the tightness could be lower conditional on the outcome of the G-sec buyback,” said Upasna Bhardwaj, chief economist at Kotak Mahindra Bank.
The RBI conducted three-day variable rate repo (VRR) auction on Tuesday for the notified amount of Rs. 1.25 trillion, for which the central bank received bids worth Rs. 1.97 trillion from banks.
After staying surplus in the first half of April, liquidity in the banking system has returned to deficit in May. The average system liquidity slipped into deficit of Rs. 1.2 trillion for the first 15 days of May against a surplus of Rs. 20,240 crore seen in April.
The RBI, on Tuesday, offered four securities for buyback which included, 7.35% GS 2024 maturing on June 22, 2024; 8.40% GS 2024 maturing on July 28, 2024; 9.15% GS 2024 maturing on November 14, 2024, and floating rate bonds 2024 maturing on November 7, 2024.