The government’s decision to repurchase short-term government bonds maturing within 6-9 months is expected to drive a decline in short-term bond yields and will also ease liquidity conditions, said market participants.
On Friday, the Reserve Bank of India (RBI) announced its plan to repurchase securities worth Rs 40,000 crore.
The securities scheduled for buyback include the G-Secs 6.18% 2024, 9.15% 2024, and 6.89% 2025, as per the RBI’s release. Notably, there is no specified amount for individual securities, and the auction process will employ the multiple-price method, said the RBI.
The decision came amidst observations that, while government spending surged between February and April, there is an anticipation of a slowdown leading up to the June election results. In consultation with the RBI, the government opted for the buyback to mitigate potential fluctuations in banking system liquidity, thus safeguarding against adverse effects on borrowing costs, said market participants.
“It will likely bring down yields on short-term bonds, and liquidity will be released in the system,” said a dealer at a primary dealership. “Also, the RBI will pay an annual dividend to the government this month (May),” he added.
Liquidity in the banking system was in a deficit of Rs 78,481 crore on Thursday, according to the latest data by the Reserve Bank of India.
The concept of a buyback of securities entails the government opting to retire a portion of its outstanding debt before the scheduled maturity date of its bonds. Essentially, it’s a proactive measure aimed at managing the government’s debt portfolio more efficiently.
“The overall supply will not be affected because bonds are going to mature this year only,” said a dealer at a state-owned bank.
First Published: May 05 2024 | 5:04 PM IST