Bonds rally in anticipation of T-Bill, bond-buying by RBI

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Published: April 21, 2020 1:45 AM

Experts say that this could be a new strategy by the government where a good part of the potential additional borrowing could be conducted via short-term instruments given the prevailing high liquidity conditions.

Last week, the central bank reduced the reverse repo rate by 25 basis points to 3.75%. Last week, the central bank reduced the reverse repo rate by 25 basis points to 3.75%.

Bonds rallied on Monday with market participants anticipating that the Reserve Bank of India (RBI) will continue its treasury bills (T-Bills) and government bond-buying from the primary as well as the secondary market in the coming weeks, thereby providing some relief to the overhang related to potential additional borrowing by the government in recent times. The benchmark yield closed 14 basis points down at 6.209% to hit the lowest level in three weeks.

Reports had indicated that the central bank has been buying treasury bills and government bonds from the primary as well as the secondary market. The exact details of the primary market transactions could not be ascertained. However, data from the weekly statistical supplement show that the RBI has conducted Rs 14,660 crore worth of open market operation (OMO) purchases from the market between April 7 and April 9. Multiple experts said this Rs 14,660 crore worth of buying by RBI is likely to have been in T-Bills.

“The borrowing is going to be huge this fiscal and therefore the market has been expecting the RBI to buy bonds which seems to have commenced. Though market participants were expecting the RBI to directly buy bonds from the auctions, the central market is seemingly doing it through primary dealers and through the secondary market transactions. The rally in bonds on Monday was largely led by this and we believe the RBI bond-buying is likely to continue in coming times,” said a primary dealer who did not wish to be named.

A noteworthy thing is the increase in the weekly T-Bill borrowing quantum. According to the revised T-Bill borrowing calendar for Q1FY21, the government has increased its weekly borrowing via these instruments to Rs 45,000 crore from the earlier notified Rs 25,000 crore. As a result, the government is now set to borrow Rs 5 lakh crore in Q1FY21 via T-Bills.

Experts say that this could be a new strategy by the government where a good part of the potential additional borrowing could be conducted via short-term instruments given the prevailing high liquidity conditions.

“If you look at the revised Q1 T-bill issuance calendar, the additional borrowing by the government stands at Rs 2.74 lakh crore in Q1 after considering the redemptions of existing T-bills and cash management bills (CMBs). It looks like the government is embarking on a strategy where they are going to rack up the short-term borrowing this year and fund a large part of the deficit using these borrowings because liquidity is so high and the RBI has reduced the reverse repo rate. It seems it is easier to sell large quantum of T-bills now,” said a treasury executive at a bank.

Last week, the central bank reduced the reverse repo rate by 25 basis points to 3.75%. Experts say it would be a smart strategy to monetise some of the higher fiscal deficit via short-term borrowings through T-Bills, given that banks are sitting on higher liquidity.

Ananth Narayan, professor of finance at SPJIMR, said that between higher expenditure and lower revenues, the actual fiscal deficit is going to be much higher than expected and the RBI will have no choice but to eventually buy bonds. “This means OMO and OMO-type transactions will be inevitable. The government can also look towards managing some of its additional borrowing via T-bills which is a very smart idea. By doing short-term borrowings, you can make banks also participate, who are sitting on high liquidity and prefer to stay away from duration risk in current times. As a result, the high quantum of T-bills will find takers,” Narayan said.

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