Govt to buy back securities worth ₹15,000 cr

Anticipating a cash crunch, the Finance Ministry has announced infusion of ₹15,000 crore into the system by buying back securities. However, this is unlikely to impact policy interest rates.

The Finance Ministry’s move is critical as the last instalment of advance tax payment is due on March 15, which will drain out cash from the system. It may be noted that companies are allowed to pay corporate tax in advance in four instalments — June 15, September 15, December 15 and March 15 — on the basis of anticipated profits in a fiscal year. However, on account of Holi and Sunday, the last instalment this year can be paid till March 18.

The Finance Ministry said it would repurchase its securities through reverse auction for an aggregate amount of ₹15,000 crore. The repurchase will be undertaken to prematurely redeem dated securities by utilising surplus cash balances. The repurchase of the Government stocks is purely ad hoc in nature and the auction will take place on March 18.

However, this move is not likely to bring down the Government’s interest liability, as six out of seven dated securities listed for repurchase are already maturing this year, while the seventh one will mature in February next. Some bond market dealers said most of these bonds were held at banks in the held-to-maturity portfolio (HTM). Now, after the auction, the banks would be able to shift some of their existing securities to the HTM portfolio. This will help in lower provisioning in case of loss on existing securities.

Meanwhile, the RBI announced the successful completion of its term repo auction for ₹50,000 crore on Friday. Technically speaking, this is a roll over of the last two term repo auctions held in February. Like repo, a term repo is also a process for banks and financial institutions to raise short-term capital from the RBI by placing dated securities. The only difference is that under term repo, the money is raised for more than one day.

All these moves seek to maintain normalcy in liquidity. This, along with lower inflation, is also creating a ground for reduction in policy interest rates. However, Aditi Nayar of rating agency, ICRA, says, “I would expect status quo on rates, not just in April but also in the June policy review.” She said inflation was down due to seasonal movement in food and vegetable prices, which are expected to rise, considering the current weather.

Echoing similar sentiments, Sunil Sinha of India Ratings, said since ₹30,000 crore worth of dated securities were maturing this month, there will not be excess liquidity, prompting banks to cut interest rates even if the RBI does not cut policy rates.

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