The auction to buy back government bonds worth Rs 12,000 crore was heavily undersubscribed today as traders preferred not to sell at a loss following the recent rise in yields.
Traders said the government planned the buyback as a cash management tool to use the proceeds of Coal India’s public offer to buy securities and reduce its debt burden.
Three bonds offered in the auction (for buyback) are maturing over the next few quarters. Selling bonds at a discount would mean taking additional burden for provisioning, traders added.
The buyback was for the 8.75 per cent, 2010 bond, the 12.32 per cent, 2011 bond and the 6.57 per cent, 2011 bond.
According to Reserve Bank of India data, investors offered bonds of face value Rs 3,173.79 crore. RBI accepted bids for Rs 2,148.29 crore. Investors placed most bids (to sell) for the bond carrying a coupon rate of 6.57 per cent and maturing next year.
From the liquidity perspective, it does not add much value, because if somebody has bonds to sell or a higher than mandated surplus statutory liquidity ratio, he has access to the LAF (liquidity adjustment facility) window, says the head of treasury with a private sector bank.
Bond yields have been moving up over the last few weeks, factoring in a sixth increase in interest rates this year on November 2.
Liquidity has been under pressure this month due to lack of government spending and cash withdrawals by the people during the festival season.
Banks have heavily used RBI’s liquidity adjustment facility this month to meet fund requirements. RBI pumped close to Rs 90,000 crore into the system today. The average daily borrowing by banks from RBI has been around Rs 70,000 crore for the past two weeks.
A share offering by Coal India, targeting as much as $3.5 billion, India’s biggest till date, has also skewed liquidity in the system. The government might resort to more such buybacks in the next two-three months to match the three-four disinvestment issues in the pipeline.
The central bank had also offered to buy back bonds worth Rs 20,000 crore in June, when there was a cash crunch due to withdrawals for third generation and broadband spectrum auction payments.
