Cash-rich govt mulls buyback of T-bills

Alarmed over the use of bonds and treasury bills (T-bills) under the Market Stabilisation Scheme (MSS) for liquidity management and the resulting interest burden on the fiscal balance, the government has proposed a buyback of T-bills under MSS since it is surplus with funds right now.

The suggestion made to the Reserve Bank of India (RBI) is also aimed at improving the Centre's fiscal balance for 2007-08. However, the central bank is not in favour of the proposal at a time when inflation has already reached a 13-month high of 6.68 per cent.

A buyback of such bonds and T-bills will mean that an additional liquidity to the extent of such buyback has to be infused into the system. This, in turn, will push up the money supply.

For the week ended March 21, the central government had a cash balance of Rs 82,227 crore with the RBI, an increase of Rs 35,986 crore over the previous week's figure. MSS helps the central bank to absorb excess funds from the system through issuance of T-bills and bonds. At present, it has become an embarrassment for the policy makers since the MSS target of Rs 2.5 lakh crore far exceeds government borrowing of around Rs 1,11,196 crore till date. 
 

SWELLING KITTY
Rs crore	MSS corpus revision
April 1, 2007	80,000 to 1,10,000
August 2007	1,10,000 to 1,50,000
October 2007	1,50,000 to 2,00,000
November 2007	2,00,000 to 2,50,000
Outstanding till date	1,69,000
Trigger for further revision	2,35,000
* MSS includes t-bills and govt bonds

This effectively means that the liquidity management function of the government has superseded its actual borrowing programme to meet planned expenditure.

In essence, analysts said, in order to meet FRBM (Fiscal Responsibility and Budget Management Bill) target and manage inflation, going forward, the government may have to sacrifice expenditure for public welfare if inflows continue to pose threat.

To fight the inflationary expectations, the government and the RBI are mulling various options. There is a proposal to curb government expenditure and keep the credit balance intact to avoid additional money supply.

In turn, the RBI has stopped further issuance of MSS T-bills to cope with liquidity tightness anticipated towards the year-end. Moreover, it is believed among sources close to the development that the RBI may revise the notified amount for borrowing programme in case there is a need to absorb excess funds from the market.

While MSS is acting well as a tool for management of liquidity, additional bills for liquidity absorption increases the burden on government finances since it has to pay for the coupon.