Faced with a Covid-19 slowdown, the government has increased its borrowing programme to Rs 12 trillion, from Rs 7.8 trillion.
The Reserve Bank of India has also increased the government’s ways and means advances (WMA) to Rs 2 trillion for the first half.
The WMA is also a short-term arrangement for the government.
But the issuance of CMB may mean that the liquidity available with the government won’t be enough, especially after the stimulus packages announced, and in the face of a falling revenue collection due to the nationwide slowdown.
However, the CMBs won’t put much pressure on the long-term yields. The short-term yields that have seen a fall in recent times due to huge systemwide liquidity will rise, which is fine, considering the overnight rates have fallen below the reverse repo rate, said a bond dealer.
Meanwhile, the markets have shed their apprehensions over state bonds. The spread between 10-year government bonds and state bonds had widened to as much as 150 basis points. Auctions done on Tuesday showed that the spread has narrowed down to 50-60 basis points, which is normal.
“Maybe an OMO announcement is overdue. As a policy, the RBI wouldn't want to remove excess liquidity given its accommodative stance. Therefore, this should be seen as a short-term arrangement. Bond yields may react negatively for a few bases,” said RK Gurumurthy, head of treasury, Laxmi Vilas Bank.