RBI: RBI to step up liquidity measures

Mumbai: The RBI is likely to raise its liquidity game to calm market anxiety and facilitate smooth government borrowing as bond yields surge despite a 75 basis point cut in interest rate.

The central bank may have to raise the amount it lends through Targeted Long-Term Repo Operations (TLTRO), and step up bond purchases, including buying corporate bonds for the first time ever. The RBI may also raise the ceiling on central and state governments’ borrowing through Ways and Means Advances (WMA), a short-term borrowing programme.

The RBI, which has been reluctant in following the sweeping actions of the US Federal Reserve, could use Section 17 of the RBI Act to extend bond purchases to include corporate bonds with sufficient haircuts, said bankers.

With inflows drying up for the investing community — mutual funds, foreign institutional investors, insurers — and risk aversion reigning high, the government faces obstacles to its borrowing plan.

Bid to keep govt borrowing cost in check


Even if it does so, it may be at a higher cost. Government borrowing costs today are where they were last November.

“No one knows the extent of fiscal implications of this extended lockdown,” said Manish Wadhawan, CEO of Serinity Macro Partners, and a former HSBC banker. “The RBI might have to increase the WMA limits of the Centre and states to balance the shortfall of revenues that these governments may be facing.”

The RBI has fixed WMA limit of the central government at ₹1.2 lakh crore in the fiscal first half of this year, while the amount for states is ₹41,890 crore. States can borrow at the repo rate for up to 90 days. In case of a delay, a 2 per cent penal rate is charged.

“The impact on growth from Covid-19 due to required measures, such as the lockdown, will require active support from the RBI to ensure that government borrowing for the current financial year is conducted smoothly,” said Srinivas Varadarajan, managing director at Deutsche Bank.

Yield on benchmark government bonds is back at 6.5 per cent, the level seen on February 6. Yields had plunged to a low of 5.98 per cent after the RBI slashed repo rate — the rate at which it lends to banks — by 75 basis points to 4.4 per cent. A basis point is 0.01 percentage point.

Last week, states such as Rajasthan and Kerala paid 150-200 basis points more than the normal spreads on sovereign bonds.

Surge in deficit

Collapsing tax revenues and a surge in Covid-related expenses could push the combined deficit of the central and state governments to 9.8 per cent of GDP, from the budgeted 6.4 per cent.

“The RBI is likely to finance fiscal deficit slippage by conducting more open market operations — buying government bonds in the secondary market,” said Anubhuti Sahay, economist at Standard Chartered.

The fear of higher fiscal deficit and the lack of guidance from the government on how it would repay and what the expenditure road map would be has led to a spike in borrowing costs. The next bond auction scheduled for Friday could indicate the market fears.