RBI likely to continue bond buying to support heavy borrowing

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Published: March 24, 2019 2:03:14 PM

The Reserve Bank of India might go ahead with its bond buying plan in the coming year, expects debt market participants given its significance in the event of a steep jump in aggregate market borrowings.

The RBI, on Wednesday, had offered a billion rupee-dollar swap for three years to create liquidity.

The Reserve Bank of India might go ahead with its bond buying plan in the coming year, expects debt market participants given its significance in the event of a steep jump in aggregate market borrowings. Importantly, the RBI, on Wednesday, had offered a $5 billion rupee-dollar swap for three years to create liquidity, the Indian Express reported.

However, the liquidity booster swap tool for better interest rate transmission and seamless raising of debt by the government would be rendered ineffective if it comes along with a drop in market operations (OMOs) to a similar extent, according to industry players. OMOs usually help in either injecting or draining liquidity from the system through a buy or sell of government bonds from market players.

On the other hand, the government has enhanced borrowings from the National Small Savings Fund (NSSF) to ease off the bond market’s pressure. Nonetheless, it might not be of much help given that states have increased market borrowings following their inaccessibility to the NSSF window.

Rs 16.77 lakh crore are estimated to be raised by the centre, states and state-owned companies through market borrowings next year, according to data from India Ratings & Research.

The government has kept states and union territories excluding Arunachal Pradesh, Delhi, Kerala and Madhya Pradesh out of raising funds via NSSF since from April 1 2016 as per the recommendation of 14th Finance Commission.

However, this has triggered higher fundraising by states from bond market. The combined market borrowings grew by around 50 per cent to Rs 15.27 lakh crore from Rs 10.30 lakh crore during FY16-FY19 period. Also, most public sector units’ borrowings through Extra Budgetary Resources also flock the debt market.

“One of the biggest issues facing the debt capital markets today is that the size of the borrowings of Centre, states and PSUs put together has increased significantly in the last three years. Now one way of helping market absorb that borrowing, although not explicit but implicit, is the RBI OMOs. OMO does two things: one, it gives liquidity, and two, it gives liquidity through the route of buying bonds. So OMOs also create bond demand,” the Indian Express quoted Amit Tripathi, Chief Investment Officer-Fixed Income at Reliance Mutual Fund as saying.

With the rupee-dollar swap, the requirements for OMOs may come down to some extent. While the swap will have good implications overall, it may have negative implications for long tenure government bonds in case the RBI cuts OMOs, he said.

However, the actual implications of the swap will be clear early next year when the RBI brings out its bond buying programme.

Through an auction on March 26, the RBI will buy up to $5 billion from the market and simultaneously sell it back to the same counterparties effective March 2022.

Irrespective of the amount of dollars mopped up through these operations will reflect in the RBI’s foreign exchange reserves for the duration of the swap even as it would reflect in the RBI’s forward liabilities. Meanwhile, the system gets rupee equivalent liquidity for the same amount and for the same duration.

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