The government plans to buy back bonds for a total of Rs 12,000 crore on October 25 to ease liquidity pressure. The announcement comes in the wake of planned sale of Rs 11,000 crore of central government bonds on October 22 and Rs 7,726 crore of state government bonds on October 26.
Facing liquidity pressure, banks have been net borrowers from the Reserve Bank of India (RBI) under the daily liquidity adjustment facility (LAF). Banks borrowed a net Rs 64,935 crore from RBI today.
Banks could face greater scarcity of funds as demand for credit starts picking up in the busy and festival season from this month.
“It is a liquidity easing step,” said the head of a public sector bond house. “Papers being bought back were to come up for redemption in next few quarters. It may not translate into fund more availability in the market. If purpose is to improve liquidity, there are better ways to achieve the same.”
The repurchase operations would be purely ad hoc in nature and will be funded through the current surplus cash balances of the government, RBI said in its statement.
RBI said it would repurchase the bonds through reverse auction and secondary market purchases.
The government plans to raise Rs 1,63,000 crore selling bonds in the second half of the financial year that began on April 1. It raised a gross Rs 2,84,000 crore from April to September. According to the borrowing calendar, RBI plans to raise Rs 33,000 crore this month by selling bonds.
Traders have been expecting liquidity infusion steps after state-run Coal India’s Rs 15,000-crore initial public offer drained funds from the banking system and lack of government spending added to tight liquidity.
They said the success of the buyback this time would depend on market conditions on the day of repurchase.
The government had offered to buy back bonds worth Rs 20,000 crore in June, when there was a cash crunch due to outflows towards third generation and broadband spectrum auction payments.
