The Annual Policy Statement of the Reserve Bank of India (RBI) points out that, unlike in the last year, almost the entire (larger) amount of government borrowings will be funded by fresh issuance of securities in 2010-11. RBI admits that it faces a dilemma. While monetary policy considerations demand that surplus liquidity be absorbed, debt management warrants supportive liquidity conditions. It says that it has to ensure that while absorbing excess liquidity the government borrowing programme is not hampered. Mercifully, RBI does not mention the debt buyback programme to help the government, although it may still be done in a desperate situation, even if it results in losses, as observed in the first half of 2009-10.
There should be no problem for the government in meeting its requirements by tapping RBI funds. The markets have missed a crucial press release of RBI on April 5, saying that the Ways and Means Advance for the Centre was fixed at Rs 30,000 crore for the first half of the year and Rs 10,000 crore for the second half. It did not say that the limit for the first half had been raised by as much as 50 per cent! Besides, the creation of the Market Stabilisation Bonds (MSS) at Rs 50,000 crore for the current year is a potential source of finance as it can be switched to the government’s cash account at a moment’s notice, as done in the recent past. Although created for stabilising the monetary situation, the stability of the government debt market could be an added objective for the MSS.
The RBI incentive for the issue of infrastructure bonds may also come in the way of the floatation of gilts on favourable terms. It has announced that non-SLR bonds of companies engaged in infrastructural activities would qualify for being included in the held-to-maturity category of banks, not subject to the mark-to-market rule, provided the residual period is seven years. Of late, the corporate bond market has been gaining in strength and the spread for a 10-year bond at about 60 basis points (bps) for triple-A rated companies is less than the norm of 100 bps. It indicates that investors do not find the bonds risky. Banks may find it attractive to shift their surplus SLR investments in gilts to corporate bonds given their better yields.
A Seshan, Mumbai
