Debt-switch programme not to impact bond yields

RBI may disclose completion only in Jan 28 policy review

The Rs 50,000-crore debt-switch programme, which is expected to begin anytime now, may not have any major impact on bond yields because most market participants will not come to know about it. The Reserve Bank of India (RBI) is expected to announce completion of the  programme during the third quarter monetary policy review on January 28.

Under the Rs 50,000-crore debt-switch plan stated in the Union Budget 2013-14, the government said it would buy short-dated debt and, in turn, sell longer-dated bonds. This is aimed at spreading out redemptions to later years.

The timing may be perfect to conduct a switch-over because of the falling bond yields. This will ensure that the programme sails through in a non-disruptive manner, also the aim of the central bank.

The programme will be conducted in a way that most participants will not be fully aware of it, like the way RBI brought the oil marketing companies back to the market for their dollar demand, without having much volatility on the foreign exchange market.

RBI had earlier said the programme would be rolled out in a non-disruptive manner. The Street believes the current market condition is conducive for the programme to happen.

Anoop Verma, vice-president (treasury), Development Credit Bank, said: “The debt-switch programme will be completed and then the market will be informed about it. Since it will be a closed-door kind of thing with one or two big institutions, RBI may just go to them and work out what is best for the government and those institutions. After the process is over, the market will be informed. Debt-switch can happen anytime. It can happen even tomorrow. Once it is done, RBI may just say they have done it.”

RBI had last week deferred the government bond auction for a notified amount of Rs 15,000 crore, in view of the comfortable cash position of the government. Besides, on Wednesday, RBI is set to conduct an open market operation purchase of government bonds worth up to Rs 10,000 crore. These announcements added to positive sentiments.

“The debt-switch programme will be done bilaterally at market prices between interested counter parties and the Government of India. The market may be informed after the deal had been struck and concluded with those counter parties. The innocent market participants will not be harmed by the debt-switch programme,” said Sandeep Bagla, executive vice-president at ICICI Securities Primary Dealership.

The yield on the 10-year benchmark government bond 8.83 per cent 2023 ended at 8.52 per cent on Monday, compared to the previous close of 8.63 per cent.

“Either on the policy day or the day when RBI completes the debt-switch programme, they (RBI) will just tell that they have completed it. The debt-switch programme will not affect the bond market,” said a government bond dealer with a public sector bank.