Why did the RBI reject most bids in the bond buyback programme?
Reserve Bank of India carries out in its role as the government's merchant banker. The operation in question is a buyback of government bonds.
But the stops and starts in executing the operation show the enormity of the task that the central bank faces in executing two of its mandates that are sometimes at odds with each other — the making of monetary policy and the management of the government's debt. Bhaskar Dutta explains the issue that has been capturing financial market headlines:
What is a government bond buyback?
In a buyback, the government uses its cash balances to prematurely pay back a portion of its outstanding borrowing through bonds. This eases some of the pressure on scheduled debt repayment obligations and has the potential to bring down the government's interest costs as a new source of demand typically pushes up bond prices and brings down their yields.
How does a bond buyback affect liquidity in the banking system?
Given that banks are amongst the largest holders of government bonds, a buyback operation injects liquidity into the banking system as lenders receive cash in exchange for bonds they are selling back to the government.
Why now?
Liquidity in the banking system is at a deficit because government expenditure — which flows through banks — is constrained during elections. So, by conducting a buyback, the government both eases future repayment obligations and infuses funds into the banking system, thereby keeping borrowing costs anchored.
How did the recent buybacks play out?
Out of a
