 "Govt announces bond buyback: Short-term yields to soften, liquidity to ease")
The Centre's decision to repurchase short-term government bonds, maturing within 6-9 months, is expected to lower the yields and ease liquidity conditions, said market participants.
On Friday, the Reserve Bank of India (RBI) had announced its plan to repurchase securities worth Rs 40,000 crore.
The securities scheduled for buyback include G-Secs 6.18 per cent 2024, 9.15 per cent 2024, and 6.89 per cent 2025, according to RBI's release.
Notably, there is no specified amount for individual securities, and the auction process will employ the multiple price method, said the RBI. The auction will be conducted on Thursday.
This kind of repurchase was last seen in March 2018.
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The decision came amid observations that while government spending surged between February and April, there is an anticipation of a slowdown leading up to the June election results.
In consultation with the RBI, the government opted for the buyback to mitigate potential fluctuations in banking system liquidity, thus safeguarding against adverse effects on borrowing costs, said market participants.
“It will likely bring down yields on short-term bonds, and money will be released in the system,” said a dealer at a primary dealership. “Also, the RBI will pay an annual dividend to the government this month (May),” he added.
Liquidity in the banking system was in a deficit of Rs 78,481 crore on Thursday, according to the latest RBI data.
The concept of a buyback of securities entails the government opting to retire a portion of its outstanding debt before the scheduled maturity date of its bonds.
Essentially, it's a proactive measure aimed at managing the government's debt portfolio more efficiently.
“The overall supply will not be affected because bonds are going to mature this year only,” said a dealer at a state-owned bank.