Has The RBI Stepped Up Support For Government Borrowings?

The Reserve Bank of India, which, among its many roles, is also the debt manager to the Government, appears to be stepping up its interventions to support increased borrowings by the centre.

The government’s financing needs have surged as it tries to counter the economic fallout from the spread of Covid-19. While expenditure has surged, revenue has dropped due to a sudden stop in business activity.

The RBI has already increased the ‘Ways And Means Advances’ limit to Rs 1.25 lakh crore for the first half of FY21. This helps meet any short-term cash mismatch faced by the government. The central bank also restarted government bond purchases under open-market-operations in March but has not announced any such purchase in April so far.

Now signals emerging from the debt markets suggests that the RBI may be going much further to support the government’s borrowing needs.

Signal 1: Bids At Primary Auction Surge

A Rs 20,000 crore government bond auction held on Friday saw a surge in bidding interest, which market participants termed as unusual.

According to data from the RBI, the bids submitted for the Rs 20,000 crore bonds on offer surged to Rs 85,135 crore. The bid-to-cover ratio surged to 4.25 times. The last auction, held a week ago on April 9, had a bid-to-cover ratio of about 3 times.

At least three senior debt market bankers said that the increased bidding had led to chatter that the RBI may have intervened by placing bids via primary market dealers.

There was heavy bidding and a sudden flow of liquidity to the government security and treasury bill market today, suggesting RBI intervention, said one of the bankers, who works at a large primary dealership. He spoke on condition of anonymity. A second bankers, also at a primary dealership, said that RBI likely bought government bonds via primary dealerships. He too spoke on condition of anonymity.

While this takes the RBI a step closer to direct monetisation of the government’s deficit, the central bank hasn’t yet gone that far. The second banker quoted above said that direct monetisation would include government bonds being directly placed with the RBI.

On Friday, Cogencis newswire quoted government officials as saying that the RBI had indirectly participated in the primary auction via primary dealers but that there was no decision to privately place bonds with the RBI.

An spokesperson for the RBI did not comment.

Signal 2: Intervention In Secondary Markets

It wasn’t just the primary auction that saw a surge in bidding. Data from the Clearing Corporation of India Ltd also shows that there was heavy trading for government bonds.

A total of 1,358 trades worth Rs 14,235 crore took place in the 6.45 percent 2029 government security. There were 295 trades worth Rs 5,400 crore in the 6.18 percent 2024 government bond. Volumes were higher than usual, the first of the bankers quoted above said.

Yields fell across most maturities on Friday. To be sure, the RBI’s decision to cut the reverse repo rate also brought down short term bond yields.

A clearer indication of increased RBI intervention in the secondary markets came from data released by the RBI in its Weekly Statistical Supplement. This data showed that the central bank has been buying up government securities even on dates when there were no scheduled open market operations planned.

Between April 7-9, the RBI purchased Rs 14,660 crore worth of government securities through open-market-operations, even though these securities were not notified as per the RBI’s usual OMO schedule. Two debt market bankers said these purchases were likely of treasury bills based on volume data for those days of trade.

Signal 3: Higher T-Bill Borrowings

Should the RBI be intervening to buy treasury bills in the secondary market, it would support the increased short-term borrowings by the government.

In a release on Friday, the central bank announced that the government will auction Rs 45,000 crore worth of treasury bills on April 22, double the amount initially scheduled. This includes: Rs 15,000 crore through 91-day T-Bills; Rs 16,000 crore through 182-day T-Bills; Rs 14,000 crore through 384-day T-Bills.

In the two auctions conducted in the first two weeks of the new fiscal, the central government has already borrowed Rs 49,970 crore through treasury bills, according to data from the RBI. In comparison, during the first two auctions in April last year, the government raised Rs 39,996 crore through treasury bills.

Not Yet Direct Monetisation

While the RBI’s interventions so far are not akin to what is traditionally considered to be direct deficit monetisation, experts say that the RBI’s support to government borrowings will need to rise in the current environment.

Eventually, the central bank will have to monetise the deficit, either directly or through open market operations, said Govinda Rao, chief economist at Brickwork Ratings. “They can’t avoid doing that,” he added.