• Investment World
• eWorld
• Catalyst
• Mentor
• Life
• Canvas
• Praxis
• Urban Pulse
• Brand Quest

Harish Damodaran

NEW DELHI, Jan. 27

WILL the Reserve Bank of India (RBI) run out of adequate stock of Government securities (G-Secs) to conduct open market operations (OMO) and `sterilise' the monetary impact of large-scale forex inflows? Well, at the present rate of forex reserves build-up and the countervailing offloading of securities by the RBI, a situation of this kind emerging cannot be ruled out in the near future.

During the current fiscal (till January 17), the RBI has sold an unprecedented Rs 53,626 crore worth of gilts from its stocks, as against net OMO sales of Rs 30,335 crore for the whole of 2001-02 and Rs 19,218 crore in 2000-01.

Even if one nets out for devolvements/private placement of securities on the central bank in primary auctions — Rs 23,175 crore so far this fiscal, compared to Rs 28,892 crore in 2001-02 and Rs 31,151 crore in 2000-01 — the fact is that the RBI's holding of G-Secs have shrunk by almost Rs 30,500 crore this year.

The figure would be higher if the RBI's sale of securities in its daily repo/reverse repo auctions through the liquidity adjustment facility (LAF) are also included. The end-result of all this has been that the outstanding net RBI credit to the Government has fallen by a massive Rs 44,124 crore between March 31, 2002 and January 17, 2002, even as the RBI's net foreign exchange assets have surged by Rs 83,095 crore during the same period.

In fact, the RBI's outstanding net forex assets are now even higher than the total reserve money stock, which represents the aggregate primary liquidity released by the central bank into the economy. In other words, the value of the RBI's dollar holdings today exceeds its entire rupee liabilities!

The current situation is diametrically opposite to that prevailing even four years back, when the primary source of reserve money creation was the Government and its huge fiscal deficits, which were `monetised' by the central bank. But in the last couple of years, unbridled forex inflows and the RBI's mopping up of dollars (leading to corresponding release of rupee resources) has become the main primary liquidity creator.

To prevent runaway reserve money expansion, the RBI, has then, been forced to suck in the excess liquidity through contraction of its lending to the Government. This has been done mainly by way of offloading its own holdings of G-Secs in the open market.

The big question now is how long can the RBI sustain its OMOs, considering that, at some point, it may probably run out of adequate stock of marketable securities. Given that the current outstanding net RBI credit to the Government is the lowest in the last eight years, such an eventuality cannot be entirely ruled out.

One way out for the RBI would be to convert its existing holdings of `special securities' into `marketable' dated stock. This includes the Rs 1,01,818 crore worth of 91-day ad hoc Treasury Bills, which were, in 1997-98, `funded' into special securities bearing a fixed 4.6 per cent interest without any specific maturity.

On September 3, 2002, the RBI did undertake such an exercise of converting Rs 10,000 worth of special securities into three dated securities containing all marketable features: 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). One can expect more such conversions in the days ahead, even though it would result in higher interest outgo for the Government.

Article E-Mail :: Comment :: Syndication

Stories in this Section
KGB, fully computerised rural bank

Copyright © 2003, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line