The repurchase of government securities is also anticipated to lower yields on short-term government bonds, as the selected securities are set to mature within six to nine months. This decrease in bond yields will reduce borrowing costs for companies, as corporate bond pricing is often linked to sovereign debt. A significant portion of corporate borrowing is done through short-term papers.
The government has identified three bonds for repurchase – the 6.18% 2024 paper, the 9.15% 2024 paper, and the 6.89% 2025 paper. The RBI has specified that offers for the auction must be submitted electronically on the E-Kuber system between 10:30 a.m. and 11:30 a.m. on May 9, with the results being announced on the same day and settlement occurring on May 10.
A buyback of securities involves the government repaying a portion of its outstanding debt before the bonds’ actual maturity dates. This process injects liquidity into the banking system, benefiting banks, which are major holders of government bonds.
As of May 2, banking system liquidity, measured by banks’ borrowings from the RBI, was at a deficit of Rs 78,481.39 crore. The RBI, acting as the government’s debt manager, advises on actions like buybacks and switches of government securities. The unexpected buyback demonstrates the RBI’s commitment to maintaining stable banking system liquidity to prevent fluctuations in borrowing costs.
Dealers noted that while government spending had increased between February and April, it is expected to slow down before the June election results. Thus, the RBI’s intervention is crucial to prevent significant deficits in banking system liquidity.
