India's move to buy back bonds runs into RBI's need to keep tight stance

By Subhadip Sircar

India’s move to buyback bonds using up surplus cash has fallen short of expectations as the central bank seems unwilling to offer lower yields to buyers lest it is seen as a pivot toward monetary easing.

Last week, the monetary authority accepted bids for about a quarter of the 400 billion rupees ($4.8 billion) of bonds the government offered to repurchase, with traders demanding higher prices. It is buying back an additional 600 billion rupees of the same notes this week.

“The market senses an opportunity,” said Rajeev Pawar, head of treasury at Ujjivan Small Finance Bank. “There is a cash-rich buyer in the market willing to pay top dollar or rather top rupee. It is an opportunity to reprice the short end of the curve.” 

While the Reserve Bank of India may be unwilling to indicate a shift in its stance, it must also keep the banking system’s liquidity needs in mind, Pawar said. There’s a deficit of about 1.5 trillion rupees in the banking system, and a buyback will help inject some liquidity.

The RBI has kept interest rates on hold, and Governor Shaktikanta Das has in the past said the authority wouldn’t consider easing unless inflation settles durably around its 4 per cent target.

“The idea was to stick around current curve and not deviate too much, leaving nothing to read between the lines,” said Naveen Singh, head of trading at ICICI Securities Primary Dealership Ltd., referring to last week’s auction. 

The government decides on repurchasing bonds based on its cash position and the auction is conducted by the RBI. One reason for the buyback is that tax revenue revenue has beaten expectations and the government is using the excess funds to retire debt, according to Bloomberg Economics.

India bought back bonds Thursday to save on interest cost, a finance ministry official told reporters in New Delhi, declining to be identified citing rules.