 "Bond traders hanker for short-term borrowing cuts as buybacks fail")
Most Indian bond traders are looking for a cut in the government's short-term borrowing as a better way to regulate banking system liquidity after two consecutive attempts to buy back debt failed, several traders said.
Government spending has been low due to an ongoing national election, leading to a build-up in the government's cash balances and a subsequent cash deficit in the banking system.
Liquidity deficit is expected to widen further in the next few days as there is an outflow of goods and services taxes.
New Delhi has cumulatively repurchased only Rs 12,600 crore ($1.51 billion) worth of bonds, far short of its offer to buy Rs 1 trillion worth of securities over two auctions conducted so far in May.
Despite the lackluster outcome the government announced a third buyback to be held on May 21, which five traders said may see a "slightly better" results because of a change in the securities being offered. India said on Thursday it will buy back bonds maturing between June and November of 2024, instead of those maturing between November 2024 to January 2025.
"The change in securities would yield better results for sure", but would still be about half subscribed, a senior treasury official at a large private bank said requesting anonymity as he is not authorised to speak to media.
"Looking at the government's cash balance, some reduction in T-bill supply would be more impactful and meaningful," he added.
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The government is scheduled to borrow Rs 22,000 crore every week through sale of T-bills, including Rs 15,000 crore from 91-day and 182-day papers, aggregating to Rs 1.32 trillion till end of June. It has already borrowed 1.89 trillion rupees in the first seven weeks of the fiscal year.
"Since buybacks are seeing limitations, the government can cancel around three 91-day and 182-day T-bill auction and that would lead to similar amount of cash management," said Soumyajit Niyogi, a director at India Ratings & Research.
India's banking system liquidity has stayed in a deficit for the last four weeks, coinciding with the start of the first phase of general elections, with average daily average deficit in May rising to Rs 1.2 trillion.
"Cancellation of T-bills is a better option for effective cash management for the government," said Vikas Goel, managing director at the primary dealer PNB Gilts.