RBI Announces Buy Back Of Govt Bonds Worth Rs 40,000 Crore & Sell Rs 29,000 Crore Govt Securities

In a move to manage its debt profile, the Reserve Bank of India (RBI) announced on Monday that it will conduct a buyback of government bonds worth Rs 40,000 crore on Thursday. However, market participants predict lukewarm participation in this third buyback auction, as banks might be reluctant to sell bonds at a loss.

The bond market experts suggest that banks may only offload securities worth Rs 5,000 crore to Rs 10,000 crore, far less than the notified amount. The reluctance stems from the fact that the RBI had already attempted to repurchase these same securities in previous auctions. V R C Reddy, head of treasury at Karur Vysya Bank, noted, "The price at which banks bought these securities doesn't change. So the participation will be low unless they offer to give up 2-3 basis points (yield) from the market price." It's essential to understand that bond prices and yields move inversely, meaning a lower yield translates to a higher price.

The bonds in question for the buyback include the 7.35% bond maturing on June 22, 2024, the 8.4% bond maturing on July 28, 2024, the Floating Rate Bond (FRB) maturing on November 7, 2024, and the 9.15% bond maturing on November 14, 2024.

Reflecting on past performances, the previous two auctions held on May 16 and May 21 saw minimal participation, with the RBI managing to repurchase only Rs 2,069 crore and Rs 10,512 crore worth of government bonds, against notified amounts of Rs 60,000 crore and Rs 40,000 crore, respectively. This pattern of low engagement shows the banks' hesitance to sell bonds at unfavourable prices.

Reddy's observation is particularly insightful, indicating that unless there is a tangible incentive for banks to sell, the participation will remain minimal. He implies that a reduction in yield by 2-3 basis points could potentially stimulate more interest from the banks.

The buyback of bonds allows the government to reduce its outstanding liabilities, thereby enhancing its fiscal position. This process involves repurchasing its own bonds before their maturity using government funds. These repurchased bonds are typically retired, effectively decreasing the total outstanding debt. This enables the government to streamline its debt profile, particularly by targeting higher-cost or shorter-term bonds.

An unnamed treasury head at a private bank elucidated the government's strategy, noting, "They (the RBI) are looking to alter this financial year's borrowing programme, that's why they have not touched any security maturing in the next financial year or beyond that." This indicates a focused approach to managing the current fiscal year's debt without impacting future obligations.

In addition to the buyback, the RBI is scheduled to sell Rs 29,000 crore worth of government securities at the weekly auction on Friday. This auction includes Rs 6,000 crore worth of 10-year green bonds. The issuance of green bonds, which diverges from the typical pattern of issuing them in the latter half of the financial year, is part of a broader strategy to raise Rs 12,000 crore in the first half of the current financial year. The green bonds are planned to be issued in two tranches of Rs 6,000 crore each, both with a 10-year tenure.

Furthermore, the RBI will issue new five-year bonds worth Rs 12,000 crore and Rs 11,000 crore of 40-year bonds. The inclusion of various maturities, from five-year to 40-year bonds, reflects a balanced approach to meet diverse investment appetites and liquidity needs in the market.

By raising funds through green bonds, the government can support initiatives aimed at reducing carbon emissions and promoting renewable energy, aligning with global environmental goals.

Overall, the upcoming bond buyback and weekly auction illustrate the RBI's and the government's multifaceted approach to debt management. While the buyback aims to refine the debt profile by reducing liabilities, the issuance of new securities, especially green bonds, reflects a proactive stance towards sustainable development and long-term fiscal planning.

However, the success of these initiatives hinges significantly on market participation. The tepid response in previous auctions signals a cautious approach by banks, influenced by the pricing dynamics and yield considerations. The RBI's ability to incentivize participation, perhaps by adjusting yields, will be crucial in achieving its objectives.

As Thursday's buyback auction approaches, all eyes will be on the level of market engagement and the potential impact on the government's broader fiscal strategy.

*Inputs from Business Standard*