RBI steps in to ease borrowing blues

Looking to raise OMO limit, borrowing cap for primary dealers.

The Reserve Bank of India (RBI) is working out several ways to ensure smooth sailing of the huge government borrowing programme in the remaining part of the first half of the current financial year.

Till date, the government has borrowed a total of Rs 205,000 crore through sale of government securities and treasury bills from the market, while net borrowing works out to Rs 172,000 crore, post-redemption. It will be borrowing another Rs 110,000 crore till September 2009. First, the central bank proposes to increase the amount of securities to be purchased from the market under its open market operations (OMOs). Currently, the RBI purchases government bonds worth Rs 6,000 crore each time it comes out with an OMO. This amount may be increased in future.

OMO is a window provided by the RBI to buy or sell government papers. This serves as an exit route for market players to sell papers, who otherwise find it difficult to offload government papers. At times, it also provides a route for the central bank to manage liquidity by sale or purchase of papers from the market.

The central bank proposes to date the OMOs closer to the auction dates and will offer to purchase papers of similar tenures as that of the paper to be sold in the auction. Thus, it will create a demand from the banks for medium-term papers, which otherwise do not find them attractive.

Sources clarified that even if there was enough liquidity in the financial system, the apex bank was buying securities from the market at a higher price and sold them at a lower price. Sources said this mismatch would be controlled with increasing rate of OMOs when the demand and supply even out.

Secondly, in its discussion with the primary dealers (PDs) of government papers, the RBI has hinted that the borrowing limit for the PDs from the call money market would be revised upwards so as to enhance their capital base for subscribing and underwriting during government auctions, said sources.

PDs are created for subscribing to government securities by participating in RBI’s primary auctions. Then they offload these papers in the market. PDs, while participating in the auction, give an underwriting commitment and thus when any government bond fails to get subscribed, these dealers get the entire lot, which is called “devolvement of an auction”.

Since most of the PDs have a smaller capital base, it restricts their bidding capacity at the auction. PDs have also sought a temporary special line of credit, based on the allotment of government papers at the auction. After the auction of government papers, these papers are allotted to participants based on their bidding amount and rates. Then they get the delivery of the papers from the RBI. In case of huge government borrowing amount, the PDs have sought that a special line of credit could help them in subscribing to the amount if it remains unsubscribed by the market.

Once the securities get offloaded in the market, the amount could be paid back. This interim liquidity facility could help them to tide over funding requirement to participate in another government borrowing in case the bulk of securities allotted in an earlier auction was yet to be offloaded in the market. Currently, PDs borrow from the collateralised lending and borrowing market (CBLO) by pledging government papers for such interim fund requirement. However, a source said that by pledging securities as collateral, these papers get stuck and could not be used if a selling opportunity came up.