
The Reserve Bank of India (RBI) has announced its intention to conduct a buyback of government bonds worth Rs 40,000 crore on Thursday, as part of its efforts to manage its debt profile. However, market participants are predicting lukewarm participation in this third buyback auction, as banks may be hesitant to sell bonds at a loss.
Banks Expected to Offload a Fraction of Notified Amount
Bond market experts suggest that banks may only offload securities worth Rs 5,000 crore to Rs 10,000 crore, which is significantly less than the notified amount. This reluctance stems from the fact that the RBI had previously attempted to repurchase these same securities in earlier auctions. Banks are unlikely to participate unless they are willing to offer a 2-3 basis point reduction in yield from the market price.
Bonds Included in the Buyback
The bonds included in the buyback are the 7.35% bond maturing on June 22, 2024, the 8.4% bond maturing on July 28, 2024, the Floating Rate Bond (FRB) maturing on November 7, 2024, and the 9.15% bond maturing on November 14, 2024.
Previous Auctions Saw Minimal Participation
The previous two auctions held on May 16 and May 21 saw minimal participation, with the RBI managing to repurchase only Rs 2,069 crore and Rs 10,512 crore worth of government bonds, respectively. This pattern of low engagement demonstrates the banks’ reluctance to sell bonds at unfavorable prices.
Incentives Needed to Stimulate Participation
V R C Reddy, head of treasury at Karur Vysya Bank, noted that unless there is a tangible incentive for banks to sell, the participation in the buyback will remain minimal. Reducing the yield by 2-3 basis points could potentially generate more interest from banks.
Importance of Bond Buybacks for the Government
The buyback of bonds allows the government to reduce its outstanding liabilities and enhance its fiscal position. By repurchasing its own bonds before their maturity using government funds, the government can effectively decrease the total outstanding debt. This enables the government to streamline its debt profile, particularly by targeting higher-cost or shorter-term bonds.
Government’s Focused Approach
The government is strategically managing the current fiscal year’s debt without impacting future obligations. An unnamed treasury head at a private bank mentioned that the RBI is focusing on altering this financial year’s borrowing program and has not touched any security maturing in the next financial year or beyond.
Additional Auction and Green Bond Issuance
In addition to the bond buyback, the RBI is scheduled to sell Rs 29,000 crore worth of government securities at the weekly auction on Friday. This auction includes Rs 6,000 crore worth of 10-year green bonds. The issuance of green bonds, which deviates from the typical pattern of issuing them in the latter half of the financial year, is part of a broader strategy to raise Rs 12,000 crore in the first half of the current financial year. The green bonds will be issued in two tranches of Rs 6,000 crore each, with a 10-year tenure.
New Bond Issuance Reflects Market Needs
The RBI will also issue new five-year bonds worth Rs 12,000 crore and Rs 11,000 crore of 40-year bonds. The inclusion of various maturities reflects a balanced approach to meet diverse investment appetites and liquidity needs in the market.
Green Bonds Support Environmental Initiatives
By raising funds through green bonds, the government can support initiatives aimed at reducing carbon emissions and promoting renewable energy, aligning with global environmental goals.
RBI’s Multifaceted Approach to Debt Management
The upcoming bond buyback and weekly auction demonstrate the RBI’s and the government’s multifaceted approach to debt management. The buyback aims to refine the debt profile by reducing liabilities, while the issuance of new securities, particularly green bonds, reflects a proactive stance towards sustainable development and long-term fiscal planning.
Market Participation Crucial for Success
The success of these initiatives depends significantly on market participation. The tepid response in previous auctions indicates a cautious approach by banks, influenced by pricing dynamics and yield considerations. The RBI’s ability to incentivize participation, perhaps by adjusting yields, will be crucial in achieving its objectives.
Importance of Thursday’s Buyback Auction
As Thursday’s buyback auction approaches, market observers will closely monitor the level of market engagement and the potential impact on the government’s broader fiscal strategy.