RBI saves for states with bond buy

RBI has been on a heavy bond-purchasing spree for the past few days. The buzz in the local bond market is that the central bank is filling up its bond kitty in order to sell them to state governments, when these players park their surplus cash with RBI.

According to figures published by the central bank in its weekly statistical supplements, state governments have not borrowed funds from RBI for the past three months. State governments borrow funds from RBI to manage mismatches in their cash positions on a day-to-day basis. Figures indicate that states borrowed small amounts from the central bank in the range of Rs 25-30 crore while the last major borrowing was only in the last week of May.

States such as Tamil Nadu, Karnataka, Rajasthan and few of the north-eastern states have seen their revenue positions improve sharply while others such as West Bengal, Bihar and Uttar Pradesh have seen borrowing huge amounts via bond programmes. Previously, RBI used to issue ad-hoc treasury bills (with a tenor of 1-14 days) to states, against surplus cash parked with RBI.

A senior trader at a bond house pointed out: ���Since the annual borrowing programme of the central government has been inclined more towards papers with a longer tenor, RBI could be considering placing securities in the 10-year segment with states from now on.��� The treasury official added: ���Seeing RBI make bond purchases is causing traders to believe that bond yields have peaked. The market was seen to be largely depending on global crude price movements and the fall in oil prices caused bond yields to slide downwards sharply.���

Market sources said the central bank could be buying bonds also to ease the imminent crunch in cash positions or for repo purposes. Apart from RBI, insurance companies are also said to be making large bond purchases. The Life Insurance Corporation of India seems to be purchasing bonds as it is seeing huge accruals on its unit-linked schemes.

The head of a leading bond house explained: ���It is too early to comment on these trends, things may fall in place once the central bank releases figures on borrowings through the market stabilisation route. RBI could be buying bonds to help state finances, however, the extent of purchases driven by this motive is not yet known.���

These purchases could also be reflected in the daily trading volumes in the local bond market. Daily volumes have almost doubled over the past few weeks from less than Rs 3,000 crore to over Rs 5,000-6,000 crore now. Bond prices too have risen sharply by over 80 paise in the past one week as yields in the 10-year segment came off the 9%-mark.