×
Home Companies Industry Politics Money Opinion LoungeMultimedia Science Education Sports TechnologyConsumerSpecialsMint on Sunday
×

RBI buys government bonds to boost its stock, first since 2006

RBI buys government bonds to boost its stock, first since 2006
Comment E-mail Print Share
First Published: Sat, Dec 29 2007. 12 54 AM IST

Buying spree: The RBI action is also generating liquidity in the system at a time when the market is witnessing tight money supply.
Buying spree: The RBI action is also generating liquidity in the system at a time when the market is witnessing tight money supply.
Updated: Sat, Dec 29 2007. 12 54 AM IST
Mumbai: The Reserve Bank of India (RBI) is buying Indian government bonds from the market. This is for the first time that the central bank is buying bonds from the market ever since an Act, which came into force in April 2006, prevented it from buying bonds directly from the government. The Fiscal Responsibility and Budget Management Act does not allow the government to privately place bonds with the central bank. In first three weeks of December alone, it has bought bonds worth Rs4,690 crore as it replenishes its stock of bonds that the central bank needs to offer as collateral when it sucks out liquidity from the banking system.
Buying spree: The RBI action is also generating liquidity in the system at a time when the market is witnessing tight money supply.
The RBI sucks out excess liquidity from banks through its reverse repo window, offering a 6% interest rate. While taking money from banks, it is required to offer government bonds as collateral. For instance, when it sucks out Rs1,000 crore, it needs to offer an equivalent amount of government bonds as collateral to banks. According to estimates by a bond dealer who does not wish to be identified, the RBI has a stock of Rs80,000 crore of bonds, with some Rs10,000 crore worth of them set to be redeemed by the government in early January.
“RBI needs to buy bonds to maintain its stock,” he said. Mint couldn’t independently verify this claim.
The RBI action is also generating liquidity in the system at a time when the market is witnessing tightness in supply of money, following an outflow of advance tax, paid by corporations. The government has collected more than Rs35,000 crore advance tax in December. Indian firms are required to pay advance tax every quarter. RBI’s bond buying has also boosted the sentiment in the market. The yield on 10-year benchmark bond dropped to 7.81% on Friday, as its price rose, from the 7.88% level seen even a week back. The yield and prices of bonds move in opposite directions.
The yield on 10-year benchmark security had closed at 7.84% on Thursday. There is a rally in long dated bonds as well. For instance, the yield on 30-year paper went down to 8.17% on Friday, from 8.35% early this month.
According to Vijay Anand, associate vice-president, money market, Development Credit Bank, the Indian bond market is bullish on expectations of good liquidity condition in the near future.
“The advance tax that the government received should come back to the system in January. The market is expecting easy money at the start of the year,” Anand said.
Arun Kaul, head of treasury at Punjab National Bank, says RBI’s bond buying is a signal to the market that the Indian central bank is concerned about the tight liquidity situation in the market and it is taking steps to address that.
“This is time for credit demand to pick up,” he said. “But, with the hike in banks’ cash reserve ratio (CRR), huge MSS issuance by RBI and a slowdown in foreign fund inflow, the liquidity situation is tight.”
CRR is the money that banks are mandated to keep with RBI. Following the tightness, the RBI has in fact started infusing money through its repo window. In the past week, on an average, it is infusing Rs33,200 crore every day to help banks tide over the temporary liquidity tightness. RBI’s reverse repo, through with it sucks out liquidity, and repo, through which it infuses liquidity, windows are part of its daily liquidity adjustment facility.
Says A. Prasanna, vice-president of ICICI Securities Primary Dealership Ltd, which buys and sells government bonds: “RBI’s bond buying is a tool of monetary management. It has got nothing to do with managing yield of government bonds.”
Comment E-mail Print Share
First Published: Sat, Dec 29 2007. 12 54 AM IST