RBI Reduces Government Treasury Auctions:
Amid tight liquidity conditions, the central bank has announced a significant reduction in government treasury bill sales and introduced new bonds for buyback operations to assist in releasing cash for banks.
Market participants noted a considerable tightening of liquidity in the banking system this month, primarily attributed to subdued government spending during the ongoing general elections. This tightening escalates the cost of funds for banks, particularly as credit growth continues to outpace deposit growth significantly. Consequently, higher borrowing costs for banks lead to increased borrowing costs across the economy.
As of May, the average daily deficit liquidity, measured by banks’ borrowing from the RBI, stood at Rs 1.2 lakh crore.
In recent engagements with the RBI, banks, especially state-owned lenders, urged for a selection of government securities in buyback auctions that would enable bidding at levels acceptable to both lenders and the central bank. Additionally, banks proposed reducing the volume of T-bill borrowing.
Following two successive government bond buyback auctions where discomfort with bond prices led to the rejection of most bids, the central bank has issued a fresh list of securities for repurchases while announcing a Rs 60,000 crore reduction in T-bill borrowing.
Bond buybacks serve to inject liquidity into the banking system.
Discussions between the RBI and nationalized banks ensued after recent government bond buyback auctions, where most bids were rejected. The crux of the matter was whether the bonds offered for buyback were priced at levels comfortable for banks.
The logical outcome of government bond buybacks is the premature reduction of debt obligations for the Centre, providing the banking system relief from tight liquidity.
After market hours on Friday, the Reserve Bank disclosed plans to auction Rs 72,000 crore worth of government T-bills weekly between May 22 and June 26, down from the previously announced Rs 1.32 lakh crore. T-bills, short-term securities issued weekly by the government, manage near-term finances.
Reducing the supply of T-bills frees up more cash for banks that would otherwise be tied up in these instruments. Interestingly, the reduction in T-bill borrowing aligns with the volume of bonds the government plans to repurchase in its upcoming operation on May 21.
According to another source, the RBI has effectively managed the situation by timely T-bill reductions, especially given the government’s substantial cash balance as spending is curtailed before election results.
Moreover, the new bonds announced by the RBI for the next buyback are closer to par value, making it easier for banks to sell to the government at acceptable prices.
