Govt again proposes to buy back WPI bonds

As expected by the market, the government again proposed to buy back wholesale inflation-linked bonds worth Rs 6,500 crore, the entire lot. The government had rejected all bids by investors in these bonds on January 14. The Reserve Bank of India (RBI) on Friday through a notification on its website said it would repurchase the 1.44-per cent inflation indexed bonds on February 11. "The repurchase will be undertaken to prematurely redeem the government stock by utilising surplus cash balances."

The above repurchase of the government stock is purely ad hoc in nature," RBI said in its notification.

The bond buyback announcement comes at a time of acute liquidity shortage in the bond market. To help the bond market investors, RBI on Thursday had said it would repurchase Rs 10,000 crore of bonds on Monday from the secondary market under its open market operations.

In the last auction, against Rs 6,500 crore on offer, 124 bids worth Rs 6,004 crore were received by the central bank. However, investors bid 87-89 a piece, against the prevailing market price of 83-84 a piece, prompting the RBI to reject all bids that time.

The inflation-indexation bonds have turned completely illiquid due to lack of interest and as Wholesale Price Index (WPI)-based inflation turned negative.

The WPI bonds, issued back in 2013 for institutions, lost its importance once RBI officially took Consumer Price Index (CPI)-based inflation as the benchmark for policy formulation. Subsequently, RBI issued CPI bonds for retail customers and WPI bonds became out of fashion.