The government is unlikely to cancel auctions of central government securities scheduled for the first half of the current fiscal year, despite receiving a record dividend from the Reserve Bank of India (RBI). Officials from the Ministry of Finance have told bond market participants that they do not intend to alter their borrowing plan for the initial six months.
Following the RBI’s announcement on Wednesday of a higher-than-expected dividend of Rs 2.11 trillion for the government, a clarification has emerged. The bumper dividend sparked speculation among bond traders that an excess cash infusion might lead the government to cancel securities auctions.
“The ministry officials have made it clear that the government will borrow whatever has come out in the calendar. They are not willing to tinker with their borrowing program,” a senior official told FE after meeting with the officials of the Ministry of Finance. “They feel changing the borrowing programme will send the wrong signal to the market- that we said something and doing something else,” he added.
He said that the ministry thinks that it might not be the best for price discovery, adding that the cancellation of auctions will create uncertainty among traders.
As per the earlier announced calendar by the central bank, the government will borrow Rs 7.5 trillion during the first half of the current financial year while for the full year, the government plans to borrow 14.13 trillion. According to the RBI, the gross market borrowing of `7.5 trillion will be completed through 26 weekly auctions, spread over securities with maturities of 3, 5, 7, 10, 15, 30, 40, and 50 years.
Bond traders believe that higher dividends will prompt the government to conduct more buybacks of securities and will improve liquidity in the banking system. According to bankers, the government will choose buybacks to infuse liquidity until the new government takes charge after a month.
The easing in liquidity will cool the short-term rates and bring the overnight rates down, say bankers. Bankers expect overnight rates to fall below the repo rate.
“As a result of improvement in liquidity, overnight rates which are currently hovering between the repo rate and MSF rate are expected to range between the SDF rate and the repo rate,” said V Ramachandra Reddy, head of treasury, Karur Vysya Bank.
Due to tight liquidity conditions, overnight rates are hovering at the repo rate (6.5%) and Marginal Standing Facility (MSF) rate (6.75%). The Standing Deposit Facility (SDF) rate currently stands at 6.25%.
“With the pick in government spending, seasonal reduction in currency in circulation, and anticipated inflows on account of index flows over coming months, the outlook on liquidity dynamics improves materially,” said Rajeev Radhakrishnan, chief investment officer – fixed income, SBI Mutual Fund. “This should enable a closer alignment of overnight rates to the repo rate as well as a steepening in the curve” he added.