RBI may issue bonds to mop up liquidity

The finance ministry is likely to ask the Reserve Bank of India (RBI) to issue a new set of bonds, instead of government securities, to partially mop up excess liquidity from the domestic market.

According to finance ministry officials, funds raised through government borrowing have to be placed in the Consolidated Fund of India (CFI), which is immediately reflected in the fiscal deficit.

The ministry's position is based on an analysis of the burgeoning foreign exchange reserves in the country and RBI's consequent proposal to set up a fund under the Public Accounts, which will receive the proceeds from the proposed market stabilisation bond.

It would be easier for the finance ministry to issue bonds to operationalise the fund, a RBI spokesperson said. The ministry has, however, argued that it can issue bonds only for accrual to the CFI, and a change will need a constitutional amendment.