RBI may shift govt borrowing towards shorter tenures in H2

Mumbai: Traders expect the Reserve Bank of India (RBI) to tilt the government's borrowing programme toward short-tenure securities in the second half of the fiscal year, which could help absorb surplus liquidity in the banking system.

Issuances in the 5-7 year segment are likely to remain in focus, even as the RBI announced a ₹1 lakh crore open market operation (OMO) auction for the last two weeks of September. The OMO sales are unlikely to materially alter expectations of higher short-term borrowing, as the planned ₹1 lakh crore OMO sale may not be enough to absorb the banking system's excess liquidity.

Traders said short term bonds should make up 35% of total borrowing. It was 28% in the corresponding period last year and 31% in the first half of this fiscal year.


The RBI, on behalf of the government, will announce its borrowing calendar in the week of September 28, and is expected to raise ₹7.9 lakh crore in government bonds.

Last year, in the second half the government had borrowed ₹6.77 lakh crore.

"There is strong banking appetite in the 5-7 year bucket, and this points toward enhanced short end bond issuance by the RBI," said Vidya Iyer, head-fixed income, ICICI Prudential Life Insurance Company.

The strong appetite for these bonds comes as banks have recently seen a surge in liquidity following massive inflows of $136.4 billion under the FCNR(B) scheme, significantly above market expectations. The higher than expected inflow prompted the RBI to reassess how to absorb the extra liquidity.

The daily average surplus in September so far is ₹10.25 lakh crore. The daily average was at ₹3.67 lakh crore in August and ₹1.07 lakh crore in July.

Shailendra Jhingan, head of treasury at ICICI Bank also agrees with Iyer. "We think that the RBI will increase supply of bonds in the shorter end, given that the bulk of liquidity that has come in is in the 3-5 year bucket. With the yield curve this steep, it makes sense to increase short term issuances and take away from the long bonds," Jhingan said.

The RBI announced on Friday that it will conduct OMO sales of ₹1 lakh crore in three tranches in the remainder of this month. And while all the bonds listed for the current OMO sale fall in the 3-6 year bucket, this OMO sale is not enough for the RBI to drain excess liquidity.

The OMO announcement came hours after the RBI governor said in a media interview on Friday that all options to drain liquidity are on the table. Governor Sanjay Malhotra said that "nothing is off the table" and the central bank could consider measures like cash reserve ratio (CRR), market stabilisation scheme (MSS) and cash management bills to drain surplus liquidity.

"I think the OMO sale only conforms to the fact that the inclination is for issuance of short tenor bonds. The OMO should also be seen in the backdrop of reluctance from banks to participate in the 26 Day VRRR auction," said AN Vinod, head of treasury, South Indian Bank.

The central bank conducted a 26-day variable rate reverse repo operation (VRRR) on Friday for ₹5 lakh crore, where banks bid just ₹60,449 crore.