The Reserve Bank of India (RBI) purchased central government bonds from secondary market last week and sold them to state governments to help them replenish their stock of gilts that expired last month.
“The amount held in the (Consolidated Sinking) Fund is invested in government securities as it earns a better return. Since there was redemption of bonds last month, the RBI reinvested the money in other bonds on our behalf,” said a state government official.
A part of the state governments’ surpluses are kept in Consolidated Sinking Fund, officials said, adding that the fund is operated by RBI.
Two government bonds — Rs 10,000 crore of 11.40 per cent, 2008 and Rs 4,500 crore of 4.88 per cent, 2008 — matured late August.
The central bank’s weekly statistical supplement data showed that RBI bought Rs 3,635 crore of gilts from the market and sold papers worth Rs 3,411 crore in the week to August 29.
“Whenever there is redemption, the need for selling bonds to states arises. Otherwise, it is not necessary that such open market operation will happen on a sustained basis,” said an official.
By investing in government securities, states can avail special ways and means advances from RBI to the extent of their investment, officials said.
“As per the recommendation of 12th Finance Commission, states can maintain part of their liabilities under consolidated sinking fund. This fund takes care of bulk repayments of states,” said another senior state government official.
States cannot trade in secondary gilts market directly. Their surplus funds are invested mainly in T-bills.
But some part of the cash surplus can be kept in Consolidated Sinking Fund, a part of which can be invested in dated securities.
States have requested the RBI to allow them to earmark a larger amount for non-competitive bidding at government bond auctions.
States participate in government bond auctions via non-competitive bidding. Currently, up to 5 per cent of notified amount is allowed for non-competitive bidding at a gilt auction.
Such open market purchases by the RBI on behalf of states may help in easing liquidity to the extent of the gilt purchases, but that is impacting liquidity in the bonds.
“The market already seems to be sitting light on bonds. And when the RBI has bought securities, it is putting more pressure,” said a dealer at a primary dealer firm.
He said the RBI’s purchases have added to the inversion in yield curve. However, the main demand for bonds is from banks themselves looking to maintain their statutory liquidity ratio.
