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Harish Damodaran

NEW DELHI, June 15

BY announcing the conversion of Rs 20,000 crore worth of non-transferable `special securities' issued to the Reserve Bank of India (RBI) in 1997 into `marketable' dated stock, the Government has considerably enhanced the latter's ability to conduct open market operations (OMO) and sterilise the monetary impact of large-scale forex inflows.

The Government had originally issued Rs 50,818 crore worth of the `Special Securities 1997' to RBI following its move to discontinue fresh issue of ad hoc treasury bills with effect from April 1, 1997. All outstanding ad hoc and tap treasury bills were `funded' into these special securities, which are non-transferable and bear a fixed 4.6 per cent interest in perpetuity.

However, during the same year (1997-98), RBI converted Rs 20,000 crore worth of the special securities into marketable dated stock in four phases of Rs 5,000 crore each. The stated objective then, too, was to ensure an adequate stock of Government securities with RBI for it to undertake OMO to modulate liquidity conditions.

The next conversion exercise took place only in September 3, 2002, when the Government replaced Rs 10,000 crore worth of special securities with three dated securities — 7.27 per cent 2013 (Rs 4,000 crore), 6.18 per cent 2005 (Rs 3,000 crore) and 7.38 per cent 2015 (Rs 3,000 crore). And now in its latest move, the Finance Ministry has announced that it would be issuing a fresh dated stock for an aggregate amount of Rs 20,000 crore in conversion of the special securities. The new securities - containing, as before, all marketable features of regular Government paper, including eligibility for read-forward facility - are 5.48 per cent 2009 (Rs 5,000 crore), 6.05 per cent 2019 (Rs 7,000 crore) and 6.17 per cent 2023 (Rs 8,000 crore).

After the latest round of conversion, the RBI's holdings of the special securities issued in 1997 will dwindle to hardly Rs 818 crore, which considerably narrows down the scope for further such conversion exercises in the months ahead. But RBI is still left with Rs 71,000 crore worth of special securities, which were issued to it in the 1980s and early 1990s as part of `funding' operations, involving conversion of ad hoc bills. These old special securities, too, can technically be converted into dated marketable securities, which the apex bank could use for its OMO.

The issue of RBI having an adequate stock of marketable Government paper to conduct OMO has gained prominence particularly over the last year, when it has had to offload huge quantities of securities in the open market to offset the impact of large-scale forex inflows. During 2002-03, RBI sold Rs 53,780 crore worth of gilts from its stocks, as against net OMO sales of Rs 30,335 crore in 2001-02 and Rs 19,218 crore in 2000-01.

The RBI's outstanding holdings of Government of India rupee securities as on June 6, 2003 stood at only Rs 97,200 crore, compared to Rs 1,53,427 crore on the same date last year. If one excludes the special securities component (around Rs 92,000 crore prior to the latest conversion), the actual marketable dated stock with the RBI, which it can use for OMO, would be hardly Rs 5,000 crore.

The latest conversion exercise would help bolster the RBI's OMO armoury.

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