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The Reserve Bank of India (RBI) had clearly saved the day for the government in helping it borrow money at lower cost during the January-March 2021 quarter, despite spike in its borrowings, the latest quarterly public debt management report showed.
The government announced additional borrowing of ₹80,000 crore for FY21 in the Budget on February 1 this year, which led to a situation where the market found it difficult to absorb the supply. The yields also reacted negatively due to high fiscal deficit proposed in FY22 and higher-than-projected fiscal deficits for coming year.
Besides, rising crude prices and the gross borrowing amount of ₹12.06 lakh crore — more than market expectations — contributed to the hardening of the yields.
However, it is the RBI’s Monetary Policy Committee which gave comfort to the market by keeping Repo rate unchanged at 4 per cent at its meeting on February 5 and also announced the continuing with accommodative stance as long as necessary — atleast during the current financial year (2020-21) and into the next financial year (2021-22), the report highlighted.
OMO, G-Sec and Yield
The continuous announcement of Open Market Operations (OMO) by RBI, the US Federal Open Market Committee’s to keep interest rates near zero through 2023, lower demand by the real sector, cancellation of G-sec auction in the last week of March supported the yield, the quarterly public debt management report released by the Finance Ministry on Friday highlighted.
Commenting on the finance ministry’s report, Madan Sabnavis, Chief Economist, CARE Ratings, told BusinessLine : “Public debt management report of the government released today shows that the RBI played a critical role in managing the yield curve in FY 21 and hence facilitated a large government borrowing programme. While the room to lower repo rate below 4 per cent was limited large purchase of around ₹3 lakh crore of OMOs as well as operation twist (where different maturities are bought and sold) combined with TLTROs helped to stabilise the yields at a time when there was too much paper in the market”.
He highlighted that the same scene continues this year too with the RBI overtly stating that one of the objectives of the monetary policy is to manage the yield curve.
Liquidity woes
Meanwhile, a report from CARE Ratings on Friday highlighted that ₹26,000-crore government paper auctioned by the RBI on Friday saw a mixed response. Once again, the response to the 5.85 per cent 2030 paper was negative and it went unsubscribed. There have been two earlier occasions when the ten-year paper devolved on the primary dealers.
The market is still demanding more from the government given the large borrowing programme as well as the rising inflation trend, according to CARE Ratings. Since the beginning of the pandemic last year, the RBI has had to face the challenge of providing enough liquidity to finance the increased government borrowing without allowing interest rates and bond yields to rise. The central bank continues to face the same challenge in the current fiscal too, say economists.
The other major concern is that despite adequate liquidity infusion and reduction in interest rates, the growth of credit has remained at a low pace.
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