Primary dealers ask for more short-dated securities, FRBs

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Mumbai | Published: March 22, 2018 2:39:48 AM

Government intends to borrow a record Rs 4.07L cr from the money market in 2018-19.

FRBs, short-dated securities, money marketThe government intends to borrow a record Rs 4.07 lakh crore (on net basis) from the money market in 2018-19

In a meeting with officials in the finance ministry before the finalisation of the government’s borrowing calendar for the next fiscal, primary dealers are believed to have suggested issuing of more short-dated securities and floating rate bonds (FRBs), in order to incresase demand for government securities, according to sources.

Although the meeting is an annual feature before the borrowing calendar is released, this time the sharp rise in yields was an important area of focus, making the interaction more significant.

The government intends to borrow a record Rs 4.07 lakh crore (on net basis) from the money market in 2018-19, lower than the revised estimate of Rs 4.8 lakh crore for 2017-18 but much higher than the budgeted estimate of Rs 3.5 lakh crore for the current fiscal.

Public sector banks (PSBs) that are the biggest buyers in the government securities (G-secs) market have considerably reduced their purchases over the last few months as they are staring at massive mark-to-market (MTM) losses in their bond portfolios because of the rising yields. This lack of buying by PSBs has accentuated the surge in borrowing costs due to a distortion in the demand supply dynamics, as other market participants too choose to tread cautiously.

Issuing more short-dated securities would come as a relief in a rising yield environment because an investor holding short-duration papers will have a lower MTM loss compared to an investor with longer-dated securities in the portfolio.

“We suggested a reduction in duration of bonds that are likely to get auctioned so that the MTM pain comes down for market participants. If yields continue to remain high, the market will not have the capacity to absorb the supply with the commencement of the government borrowing,” said a dealer.

Primary dealers also suggested issuing more FRBs as part of the government’s borrowing programme. In an FRB, coupons are calculated based on the average rate of the implicit yields at the cut-off prices of the last three auctions of six-month Treasury Bills. The rates get reset every six months.

As a result, investors holding FRBs will have minimal MTM losses in a rising yield environment. Market participants will also earn better returns when rates get reset to higher levels.

Dealers are also believed to have discussed the opening up of investment limits for foreign portfolio investors (FPIs) in G-secs to almost 6-8% of the outstanding stock, in a gradual manner from the current 5% limit.

Promotion of more retail participation in the G-sec market was also discussed with suggestions that some sort of tax incentive be offered to make the instruments more attractive.

Sources said, the government and the RBI might meet again to finalise the borrowing calendar for the next fiscal year, which is likely to be out very soon.

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