The Hindu Business Line : Liquidity continues to surge with no Govt borrowings in sight — RBI may deploy prepayment bonds for mop-up

The sale is being resorted to as there are still no indications of any fresh round of borrowings by the Government. The auctions for one round of borrowing were postponed earlier this month.

Bangalore , April 29

DELUGED by liquidity, the Reserve Bank of India is expected to deploy the privately placed prepayment bonds for mopping up operations.

The bonds likely to be deployed are the 5.32 per cent maturing in 2014. These bonds were placed with RBI for prepayment of high cost Asian Development Bank loans.

Banking sources said deployment was expected to coincide with the redemption of three securities maturing next month. These securities are the 12.35 per cent 2004, the 11 per cent 2004 and the 11.50 per cent 2004, and are expected to release at least Rs 5,500 crore of liquidity in the market. They said that the Ministry of Finance had already cleared the sale of these securities by RBI.

The sale is being resorted to as there are still no indications of any fresh round of borrowings by the Government. The auctions for one round of borrowing were postponed early this month. The only borrowing that has been carried out so far is through T-bill auctions.

But despite the increase in amount in the t-bill auctions, including the market stabilisation scheme, the banking system continued to be awash with liquidity, thesources said.

This was in addition to the repeated interventions through 7-day repurchase operations. Despite these large interventions, the yields on T-bills continued to be below the repo rate. At Wednesday's T-bill auctions, the yields on 91-day and 364-day were 4.37 per cent and 4.43 per cent, respectively. The high liquidity in the market was evident from the large repo outstandings, which are currently in excess of Rs 70,000 crore.

The sources said absence of Government borrowings also complicated the high liquidity situation in the market. Issue of dated Government securities is normally high during the lean season. Such borrowings are also carried to refinance maturing loans. Instead, the Government, flush with cash has opted for redemption of securities.

Bankers are now speculating on further prepayments to multilateral institutions in view of the large accretions to the foreign exchange reserves to supplement the sterilisation operations.

Prepayments entail making further private placements with RBI, increasing its stock of securities for market intervention. Simultaneously, the prepayments would also ensure a deceleration in the rupee's appreciation against the dollar, the sources said.

However, one of the major problems is that the loan covenants with multilateral institutions like the World Bankentail large prepayment fees. ADB's loans permit though permit premature repayments.