While the Covid-19 related dislocations have strained the government coffers, switching is regularly done by governments at the beginning of the year.
The government will be converting a bond maturing this year worth Rs 30,000 crore into longer tenure bonds, including one that matures in 40 years.
The Reserve Bank of India (RBI) will be conducting the auction on May 18, it said on its website.
The central bank notified it will be switching the bond maturing in June this year in favour of three bonds
maturing in 2024, 2030, and 2060.
The government will use 2024 bonds
to switch Rs 13,000 crore, 2030 for Rs 13,000 crore, and Rs 4,000 for the 40-year paper.
While such switching is fairly common, converting bonds
maturing in a few months into bonds as long as 40 years have never happened. Technically, this is opposite of Operation Twist that the central bank undertakes, in which it buys long-term bonds, selling an equivalent amount of short-term bonds.
The RBI’s actions enable long-term yields to come down, so that the government can borrow cheaply. However, the switch, in this case, will push up yields, as the market will deem it as almost an addition to the existing borrowing plan.
In terms of interest outgo, the government’s cost goes up as the market will adjust for tenure premium. Still, the yields are relatively low now and that may have encouraged the government to lock in the rates for as long as 40 years, said a bond dealer.
The 40-year paper is not a new instrument and is regularly used in the borrowing programme. The first such paper was issued in 2015, against which the government raised Rs 1 trillion. The volume outstanding in a paper maturing in 2059 is Rs 83,461.952 crore. The one which is being used for the current switch has an outstanding volume of Rs 15,000 crore. It was first issued as part of the first borrowing programme for the current fiscal year.
Such conversions, typically done in the first half of the fiscal year, happen to enable the government to repay loans at a later date to ease stress on the exchequer. The switching also increases volumes in the already issued long-term securities and enables further secondary market liquidity.