Till September 24, the RBI bought about Rs 2 trillion of bonds from the secondary markets. Of these, about Rs 1.40 trillion was done anonymously. In September alone, when the auctions were devolving and the RBI cancelled an OMO auction, it bought Rs 43,537 crore of bonds, of which Rs 15,000 crore was bought anonymously.
The central bank had paused on such anonymous bond purchases, but stepped up pace in September as the bond yields on a number of occasions seemed to be crossing 6-per cent mark. The RBI devolved four auctions of 10-year bonds as the market wanted higher yields. The primary dealers, who acted as the underwriter of the bonds, had to buy the unsold bonds. This may have created huge pressure on the primary dealers, who generally don’t have a deep capital base. An increased underwriting fee also was not adequate to compensate for such back to back devolvement at around the 6 per cent yields.
But the latest data shows that the central bank may have given the primary dealers a way out to square off their positions through such anonymous bond buying. The active bond buying of the central bank also contained the market yields and is an indirect monetisation of deficits done in an unannounced manner.
“The RBI’s intentions are clear, to give full support to the government borrowing programme without impacting the stability of the G-Sec market. The multiple rate cuts, liquidity infusion, OMO purchases, twist OMOs, cancellation of auction bids at higher yields are testimony,” said Joydeep Sen, fixed income consultant of PhilipCapital India.
“If and when there is any excess government borrowing, we expect support from the RBI, in terms of OMO purchases or other methods,” said Sen. The bond buying is significant because the market wanted the RBI to support the market through OMOs. Market participants say the RBI should bring out OMO calendar to assure the market of support. However, the RBI may be wanting to keep some element of surprise, even as it continues to extend its support for the market.
While the second half buying programme has been kept unchanged at Rs 4.34 trillion, most in the market expect excess borrowing later in the year.
The consensus is that the government may borrow Rs 2 trillion more. Bank of America expects excess borrowing of Rs 2.3 trillion to fund 12.7 per cent of overall fiscal deficit. But the extra borrowing could be down unannounced too, or through short-term treasury bills. In the first half of the fiscal year, the Centre borrowed Rs 66,000 crore extra via the greenshoe option. This is because the average yield of the borrowing for Centre was just 5.82 per cent.