Bloomberg News

RBI to Buy Bonds for First Time in Ten Months to Boost Cash

November 17, 2011

(Adds Standard Chartered forecast in sixth paragraph.)

Nov. 17 (Bloomberg) -- India’s central bank will buy government bonds this month for the first time since January to boost cash in the banking system.

The Reserve Bank of India will purchase a total of 100 billion rupees ($1.97 billion) of notes through an open-market operation on Nov. 24, the central bank said in an e-mailed statement yesterday. The securities to be bought back will be announced “shortly”, the RBI said.

The move comes after four of the last five debt sales this quarter failed to attract adequate investor demand, amid shrinking confidence in the government’s ability to rein in record bond sales and persistent inflation. Wholesale price increases have held above 9 percent for 11 months and the finance ministry increased its borrowing target for the year through March by 13 percent to a record 4.7 trillion rupees on Sept. 29.

“The liquidity situation is quite stressed,” said Anoop Verma, a fixed income trader at Development Credit Bank Ltd. in Mumbai. “The RBI has to buy bonds if it has to push through its borrowing program for the year.”

The yield on the 8.79 percent security due November 2021 declined one basis point, or 0.01 percentage point, to 8.88 percent in Mumbai yesterday, the lowest level in a week, according to the central bank’s trading system. The rate touched a three-year high of 8.97 percent on Nov. 14. The purchases will help push the yield to 8.5 percent by Dec. 31, according to a report by Nagaraj Kulkarni, a Mumbai-based fixed-income strategist at Standard Chartered Plc.

Fiscal Deficit

The Reserve Bank last bought 75 billion rupees of government debt in January in auctions as part of a program to purchase 480 billion rupees of securities, according to its website. Lenders have borrowed an average 796 billion rupees each day from the central bank this month, compared with 507 billion rupees in October, suggesting cash is becoming less readily available in the financial system.

The central bank will buy as much as 600 billion rupees in sovereign debt by March to boost cash and help the government’s borrowing program, Anubhuti Sahay, a Mumbai-based economist at Standard Chartered, said in an interview Nov. 15. The fiscal deficit may widen to at least 5.4 percent of gross domestic product in the fiscal year ending March, compared with a target of 4.6 percent, spurring more borrowings, Sahay said.

Bank of America Corp. predicts the 10-year bond yield may decline between 8 percent to 8.5 percent by March 2012. The central bank will purchase about 1 trillion rupees of bonds by January, Indranil Sen Gupta, a Mumbai-based economist at the bank wrote in a note to clients on Nov. 14.

Tight Policy

The central bank has kept cash conditions relatively tight this year to help curb inflation that has remained above 9 percent for 11 straight months. The benchmark wholesale-price index rose 9.73 percent in October from a year earlier, the commerce ministry said this week. The RBI has increased its repurchase rate 13 times since the start of 2010 to 8.5 percent.

“Inflation is still at elevated levels,” said Dharmakirti Joshi, the Mumbai-based economist at Crisil Ltd., the Indian unit of Standard & Poor’s. “The central bank will still keep liquidity in a largely deficit mode and will infuse cash in a measured way.”

--Editor: Sandy Hendry

To contact the reporters on this story: V Ramakrishnan in Mumbai at; Jeanette Rodrigues in Mumbai at

To contact the editor responsible for this story: Sandy Hendry at

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