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Harish Damodaran

New Delhi , Sept. 1

THE Reserve Bank of India's holdings of Government of India (GoI) securities have plummeted to a low of Rs 69,469 crore, raising questions about the sustainability of its sterilisation operations for neutralising the continuing surge in foreign capital inflows.

Significantly, the central bank's Rs 69,469-crore stock of Government paper as on August 22 is inclusive of Rs 41,818 crore worth of `special securities'. The latter, which are non-transferable and bear a fixed 4.6 per cent interest in perpetuity, were issued to the RBI, as part of `funding' or conversion of its past outstanding holdings of 91-day ad-hoc and tap Treasury Bills.

If the special securities are left out, the RBI's dated marketable stock of GoI paper amounts to just Rs 27,651 crore. If to this, one adds the outstanding securities of Rs 35,640 crore sold through repo auctions under the liquidity adjustment facility (LAF) - these are to be repurchased in 1-14 days - the total stock of marketable securities in the RBI's portfolio for conducting open market operations (OMO) works out to Rs 63,291 crore.

True, the RBI's sterilisation armoury can still be bolstered by converting a part of the Rs 41,818 crore special securities into dated stock containing all the marketable features of regular gilts, including eligibility for ready-forward facility. Indeed, this option has been repeatedly exercised over the past year, though it has also ended up depleting the existing stock of special securities.

The RBI's original holdings of special securities aggregating Rs 71,000 crore were issued in the course of `funding' operations carried out during the 1980s and early 1990s. In addition, another Rs 50,818 crore of all outstanding ad-hocs were similarly funded during 1996-97, simultaneous to the decision to discontinue fresh issue of such bills.

But in 1997-98 itself, Rs 20,000 crore of the Rs 1,21,818 crore stock of special securities were converted into regular dated paper. During 2002-03, another Rs 40,000 crore was converted and on June 12, this year, an additional Rs 20,000 crore of special securities were replaced with marketable securities of various maturities at the prevailing yields.

In the process, not only has the stock of special securities come down to Rs 41,818 crore, but the conversion exercises have also entailed `quasi-fiscal implications'. In the latest round of conversion, for instance, the 4.6 per cent special securities were swapped with three dated papers bearing interest rates of 5.48 to 6.17 per cent.

The extent to which the RBI has had to offload its gilt holdings to suck in the liquidity created by the accretion to its forex reserves, resulting from massive external inflows, can be gauged from the accompanying Table. While four years ago, almost 46 per cent of RBI's assets was constituted by rupee securities, it is now well below 15 per cent. On the other hand, nearly 78 per cent of its assets are today made up of foreign currency holdings.

That sterilisation has perhaps "approached its limits" has been admitted by the RBI itself in its recent 2002-03 Annual Report. With capital flows expected to remain strong, sterilisation can only be a "first stage response for ongoing liquidity management". The way ahead is "durable policies (that) can be put in place to absorb capital flows for the expansion of productive capacity," the report has noted.

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