RBI announces reduction in the quantum of the government’s treasury bill sales

English | 18 May, 2024 | 10:13 AM
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Following interactions with lenders amid tight liquidity conditions, the central bank has announced a steep reduction in the quantum of the government’s treasury bill sales and a new selection of bonds for the Centre’s buyback operations to aid freeing up cash for banks.

Liquidity conditions in the banking system tightened considerably this month, largely due to a muted pace of government spending amid the ongoing general elections, market participants said. Tight liquidity conditions increase cost of funds for banks, especially at a time when credit growth continues to outpace deposit growth by a long margin. Higher borrowing costs for banks pushes up the cost of borrowing across the economy.

So far in May, average daily deficit liquidity as measured by banks’ borrowing from the RBI was at Rs 1.2 lakh crore.

In recent interactions with the RBI, banks — particularly stateowned lenders — requested that the government securities offered in the Centre’s buyback auctions be selected in a way that facilitates bidding at levels that both lenders and the central bank are comfortable with, sources aware of the developments said. Banks had also proposed the idea of reducing the quantum of T-bill borrowing.

Following two successive government bond buyback auctions in which discomfort with the prices at which banks offered to sell bonds prompted the RBI to reject most bids, the central bank has come out with a fresh list of securities for such repurchases while announcing a Rs 60,000 crore reduction in T-bill borrowing.

“There have been ongoing discussions between the RBI and nationalised banks after the recent experience at the government bond buyback auctions in which the central bank rejected most bids. The main issue was whether the bonds that the government was offering to buy back were at a price that banks were comfortable tendering or not,” a source said.

“The logical consequence of a government bond buyback is for the Centre to prematurely reduce debt obligations and in the process the banking system also gets a reprieve from tight liquidity,” the source added.

After market hours on Friday, the Reserve Bank said that it would auction a total of Rs 72,000 crore worth of the government’s T-bills on a weekly basis between May 22 and June 26, as against Rs 1.32 lakh crore announced previously. T-bills are short-term securities that the government issues every week to manage nearterm finances.

A reduction in supply of T-bills frees up more cash for banks that would otherwise have been deployed in those instruments. Incidentally, the cut in T-bill borrowing matches the quantum of bonds that the government has offered to buy back in its next repurchase operation on May 21.

“The RBI has very effectively managed the situation by announcing a timely cut in T-bills because in any case, the government is sitting on a large cash balance as its spending is curtailed before the election results,” another source said.

“Further, if you look at the new set of bonds that the RBI has announced for the next buyback, some of these are closer to par which makes it easier for banks to sell to the government at a price that is acceptable to the RBI,” the person added.

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