Reserve Bank of India (RBI) is planning to engage in debt management operations in the garb of open market operations (OMOs). The idea is for the RBI to buy back gilt-edged securities to the extent of about 50 per cent of the new issues to be floated by the government in the first half of the financial year, to facilitate bank subscriptions to the latter. In the meantime, due to excess liquidity in the system, banks continue to park anywhere between Rs 1,00,000 crore and Rs 1,50,000 crore at the reverse repo window of the RBI, getting securities in return. This has been going on since the beginning of the financial year.
The Liquidity Adjustment Facility is designed to tackle temporary deficits and surpluses in the system and not persistent ones. Considering the need for unwinding the excess liquidity released in recent months, RBI will do well to carry out OMOs to mop up the surplus funds landing at the reverse repo window, utilising the opportunity provided by the new issues.
Banks had 33 per cent of deposit liabilities in SLR securities against the requirement of 24 per cent, as on July 3, 2009. The government securities market is a buyers’ market now.
There are two features that characterise recent auctions of government paper as a result of the uncertainty relating to interest rates. One is the predominant desire of banks to go for short-term securities, viz, treasury bills of different durations and, as a logical corollary, to shift preference to the 5-year bond from the ten-year one. The former is the bellwether security now replacing the latter. At the auction held on July 15, 2009, the bid-to-cover ratios in terms of underlying amounts were 4.96 and 3.06 for treasury bills of 364 days and 91 days, respectively. In the case of dated securities they were 3.07, 2.06 and 3.59 for those maturing in 2014, 2021 and 2035, respectively. The relatively higher ratio for the 2035 security could be due to the demand from insurance companies and provident funds.
If RBI engages in a buy-back of securities, it is likely that banks will quote high prices resulting in a capital loss for the former. Subsequently, when new issues are floated, banks may bid for low prices. It will be a case of ‘heads I win, tails you lose’!
A Seshan, on email
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