RBI Buys G-Secs with Speed

An Overview of the Purchases Made

India’s central bank chose to purchase a number of sovereign papers amounting collectively to a value of INR 34,175 Crores between April 22 and May 4, 2021. These purchases were made in order to offset borrowing costs and bring them down. This was necessary since there a high probability of the 2^nd Coronavirus wave wreaking havoc on the Indian economy which was previously attempting to recover from the 1^st wave of the virus outbreak. Bought from the secondary market, the enormity of these purchases is believed to be record-worthy considering the time frame within which they were made.

Objectives

India’s central bank – the Reserve Bank of India (or RBI) chose to increase the pace with which they bought up these sovereign bonds such that they could help revive the economy and fuel the pace of growth. While inflation is meant to be curbed as well, it presently takes a back seat.

Aimed at arresting potential rising rates of borrowing for the public, these purchases were made in the secondary markets. This is important as they help offset costs associated with the funding and are aligned with the government’s present track of keeping rates low thus far. Moreover, they help complement open market operations (or OMO) and the Government Securities Acquisition Program (or G-SAP).

Both, open market operations, as well as the government securities acquisition program, allow for a greater level of liquidity existing in the form of currency within the banks spread across the country. This is important as it allows people to have more access to money which is much needed during the time as the 2^nd Coronavirus pandemic has caused several people to lose out on their earning capacity. More importantly, it allows companies and businesses alike to function with greater ease and helps them move on from the losses they’ve incurred thus far.

Pertinent Information

Sovereign bonds bought included treasury bills (or T-bills) as well as long-term papers spread across seven purchases (or trenches).

These securities were purchased despite the fact that the country’s wholesale price index reached its highest ever value in a decade in the past month owed in part to the more costly prices of transport fuels.

T-bills are believed to have been bought in order to support the Operation Twist program set forth by the RBI. This program is aimed at selling shorter-duration papers while purchasing long-term papers aimed at preventing a spike in the benchmark yields.

These benchmark yields might have also been lowered due to the purchases made of dated papers and owed to the fact that weekly auctions were canceled.

The idealized benchmark gauge for the RBI thus far has been approximately 6%. In the time frame within which sovereign bonds were purchased, the yield amounted to 6.02% owing to a fall of three basis points.

As of April this year, the RBI canceled auctions amounting in value to INR 39,000 Crores which were made up of benchmark papers amounting to INR 28,000 Crores with the remained owed to a five-year series.

These auctions were believed to have been canceled due to participating bidders’ demands of higher yields which surpassed the RBI’s level of comfort with the same.

If we consider this financial year, open market operations have cost the RBI INR 32,220 Crore in addition to adding INR 25,000 Crore to the liquidity in the market via the government securities acquisition program. Expect to witness another investment put up for auction and amounting to INR 35,000 Crores into the GSAP tomorrow.

The banking system thus far has worked to achieve a durable surplus amounting to INR 7.26 Lakh Crores owing to the fact that their supply of securities is on the rise.

Concluding Thoughts

These actions made by the government can greatly help bring the bond yields under control and allow corporates to continue to remain in control of their interest costs, particularly those of which are mid-sized. The varying degrees of lockdowns enforced across the country for the past month have eaten into the earnings and profits of the same over the past month. Purchased sovereign bonds, OPOs and GSAP will encourage lowered borrowing rates and help increase liquidity in the economy.