Bills can be tradable; have less than 91 days maturity.
The Reserve Bank of India will issue new short-term bills to help the government tide over temporary cash flow mismatches. The move will help channel excess cash with banks to fund public spending.
The instrument, called cash management bills, will be issued at a discount and have maturities of less than 91 days, while retaining the generic character of Treasury Bills, RBI said in a statement tonight.
The surprise move comes amid a heavy Rs 451,000-crore government borrowing plan to feed a record fiscal deficit of 6.8 per cent of gross domestic product projected for 2009-10. Bond dealers said the move would impact rates at the short-end of the yield curve and send a signal to the market that the government, already borrowing heavily through long-term bonds, is facing short-term fund flow issues.
Banks, saddled with huge cash amounts due to subdued credit offtake, will park funds in the new instrument instead of the RBI’s reverse repo window, which fetches them just 3.25 per cent return. This is because the cash management bills may give higher returns. Currently, RBI absorbs over Rs 100,000 crore daily from banks through its repo window.
A senior State Bank of India official pointed out that this instrument would give another avenue to the government to borrow in the short-term. It will be in addition to the ways and means advances’ limits.
The tenure, amount and date of the bills will depend on the temporary cash requirement of the government. These bills would be tradable and used for repo transactions. Investments in these bills by banks would be considered for calculating the Statutory Liquidity Ratio (SLR), RBI added.
Private and foreign banks may find this instrument attractive as they would not have to invest in SLR instruments, which have maturity above 91 days, said a bond dealer.
Last month, the government said it will absorb two-thirds of the annual borrowing need between April and September, to take advantage of the excess liquidity and yet keep bond yields from rising due to heavy supplies. On Friday, the central bank rejected all bids at a bond auction totalling Rs 12,000 crore and that sent the benchmark 10-year bond yield down 16 basis points, to 6.97 per cent.
