A banking industry official said On Wednesday that the government is not buying back gilts under Market Stabilisation Scheme (MSS) ahead of Friday’s auction as liquidity is ample.
However, whether to conduct MSS gilt buyback or not will be reviewed every week by the Reserve Bank of India ahead of the gilt auction announcement, the official said.
“Going ahead, liquidity is expected to remain ample. The government’s borrowing is expected to translate into spending which will keep liquidity ample. Currently, liquidity is more than ample,” the official said.
The government will raise Rs 15,000 crore through auction of three government securities on Friday out of its total additional borrowing of Rs 50,000 crore by February 20.
Separately, a senior finance ministry official said On Wednesday that the final deciding authority on MSS gilt buyback is RBI.
RBI has been buying back gilts under MSS simultaneously with gilt auction to prevent liquidity from tightening due to the government bond borrowing.
However, with liquidity turning very easy, interest in selling these MSS gilts to RBI has come down as was apparent from the rejection of bids at the last MSS buyback auction.
“In the last auction, RBI did not get bids for the entire buyback amount as there is no desperation in selling these securities now as liquidity is ample,” the official said. In the last gilt MSS buyback on January 1, the RBI had rejected Rs 5,000 crore of 5.87 per cent, 2010 gilt and partially accepted the 7.55 per cent, 2010 gilt as the central bank did not get bids for the full auction amount of Rs 5,000 crore in each security.
Moreover, the cut-off yields at the buyback were low.
The 10-year benchmark security yield went up by 55 basis points On Wednesday, back to the pre-RBI rate cut levels, after the government on Tuesday increased its additional borrowing amount to Rs 50,000 crore compared with Rs 25,000 crore earlier.
The additional amount will be borrowed by February 20. “The government’s borrowing programme is need-based one. It is not a liquidity signal, and neither is it done to manage liquidity,” the official said.
With gilt yields spiking following the huge borrowing programme announcement, primary dealers are likely to bid at very high cut-off fees for underwriting Friday’s auction.
