Govt to raise Rs 80,000 cr via cash mgt bills to meet liquidity mismatch

Issuance of CMB may mean liquidity available with govt won't be enough, especially after stimulus packages, and in the face of a falling revenue collection due to the nationwide slowdown

The government will on Thursday borrow Rs 80,000 crore through 84-day cash management bills (CMB), or short-term treasury bills, used to meet temporary liquidity mismatches.

Cash management bills are off-budget items and are not in use frequently unless the government needs some interim cash. One side-effect of the CMBs is it reduces excess systemic liquidity for the tenure of the bill. The excess system liquidity, as of Monday, was at Rs 7.29 trillion. The banks are not lending out their money, and so, the liquidity is getting parked with the RBI earning just the reverse repo rate. The central bank last week reduced the reverse repo rate to 3.35 per cent.

Faced with a Covid-19 slowdown, the government has increased its borrowing programme to Rs 12 trillion, from Rs 7.8 trillion.

The Reserve Bank of India has also increased the government’s ways and means advances (WMA) to Rs 2 trillion for the first half.

The WMA is also a short-term arrangement for the government.

But the issuance of CMB may mean that the liquidity available with the government won’t be enough, especially after the stimulus packages announced, and in the face of a falling revenue collection due to the nationwide slowdown.

However, the CMBs won’t put much pressure on the long-term yields. The short-term yields that have seen a fall in recent times due to huge systemwide liquidity will rise, which is fine, considering the overnight rates have fallen below the reverse repo rate, said a bond dealer.

Meanwhile, the markets have shed their apprehensions over state bonds. The spread between 10-year government bonds and state bonds had widened to as much as 150 basis points. Auctions done on Tuesday showed that the spread has narrowed down to 50-60 basis points, which is normal.

“Maybe an OMO announcement is overdue. As a policy, the RBI wouldn't want to remove excess liquidity given its accommodative stance. Therefore, this should be seen as a short-term arrangement. Bond yields may react negatively for a few bases,” said RK Gurumurthy, head of treasury, Laxmi Vilas Bank.