Different securities used, but govt bond buyback operations still struggle

Buying back bonds on behalf of the government at very high price levels would bring down sharply, which the RBI may not be comfortable with when it is battling . and yields move inversely.

At the buyback on Tuesday, the RBI accepted bids worth Rs 5,266.04 crore as against the aggregate notified amount of Rs 60,000 crore worth of bonds that the government had offered to repurchase. The RBI had last week listed out a different set of securities for buybacks than the ones used in the previous two auctions on May 9 and May 16, likely in the hope of eliciting a better response from the market.

While the latest auction saw more bids being accepted than the one held on May 16, the gap between the amount of bonds that the government has been offering to repurchase and the quantum that it has successfully bought back remains large.

On May 16, the RBI had accepted bids worth only Rs 2,069.99 crore out of a notified amount of Rs 60,000 crore. Since May 9 – which was when the RBI announced the first auction after six years – the Centre has managed to repurchase securities worth a total of Rs 17,849 crore. The aggregate notified amount for the three buyback auctions held since May 9 stands at Rs 1.6 lakh crore.

In a buyback operation, the government uses its cash balances to prematurely pay back some of its outstanding borrowings through bonds. Banking system liquidity receives a boost through such operations as banks are large holders of government bonds.

As on May 20, based on banks’ borrowings from the RBI, systemic liquidity was at a deficit of Rs 1.48 lakh crore, latest data showed. The deficit is largely due to a slow pace of government expenditure amid the elections. END