RBI to set aside funds for buying illiquid gilts

Experts say move should come when liquidity in system tightens

The Reserve Bank of India (RBI) is working with the government to set aside funds for buying illiquid gilts from the market. “Over a period of time we will have some budget where we will try to repair some of those securities in which volumes are low, and create volumes for those securities which have higher volumes,” said Harun Rashid Khan, deputy governor, RBI, on the sidelines of a banking summit organised by the Financial Times-YES Bank on Tuesday.

According to Khan, there is a joint group between the RBI and the government where this has been discussed under cash and debt management. But it is difficult to say if immediately they will be in a position to do so, said Khan.

Experts say this move should come in when liquidity tightens in the system. “In a scenario of tight liquidity, the RBI can announce this. If this happens, it will pump in liquidity into the system, and gilt yields will also fall,” said N S Venkatesh, chief general manager and head of treasury, IDBI Bank.

BIG BOOST

• RBI working with govt to set aside funds for buying illiquid gilts
   
• Discussions between RBI and government under cash and debt management
   
• Move to boost liquidity and will help banks get rid of illiquid papers
   
• It will also help to bring down gilt yields

This move will also help banks to get rid of illiquid securities. “Banks hold a lot of illiquid securities. The difference between the yield of liquid and illiquid securities of same maturity tenure is about 10-15 basis points. If these illiquid securities are bought by the RBI, the yield curve will get realigned,” said Debendra Kumar Dash, assistant vice-president (money markets) at Development Credit Bank.

Khan says the fiscal deficit is a major concern and it should be handled by the government and the political system. “Fiscal deficit needed to be brought under control,” he said. The fiscal deficit for the current fiscal is budgeted at 5.1 per cent of the gross domestic product (GDP). However, many economists expect it will be higher than the budgeted estimate. “As we have articulated time and again, monetary policy has to be in tandem with the fiscal policy,” said Khan. It has to be a joint venture, not a solo play, according to Khan. “Fiscal deficit is a major concern in the macroeconomic scenario; so, that has to be handled. Supply-side response is also needed for inflation management,” said Khan.

The rupee has been volatile against the dollar in the last one-and-a-half years. Khan assures if there is extreme volatility the RBI would intervene in the market.

Khan is also of the view that Quantitative Easing 3 (QE3) is like a double-edged weapon, and, hence, its impact needs to be balanced. It may put pressure on commodity prices.