RBI may have taken two-step route to finance govt deficit: IDFC

By Subhadip Sircar

India’s central bank probably took a roundabout route to finance the government’s budget deficit, given that the law bars it from directly buying sovereign bonds, according to IDFC Asset Management Ltd.

The first step was to allow higher short-term borrowings through treasury bills and the so-called ways and means advances, Suyash Choudhary, head of fixed income at the asset manager, wrote in a note. This assures the government of funding equivalent to about 2.5% of gross domestic product.

“It is speculated by market participants that the Reserve Bank of India has also lately been buying into the treasury bill issuances of the government,” he added after few bidders cornered the sale at way-off prices.

Thursday’s announcement that the RBI will do a Federal Reserve-like Operation Twist and sell bills while buying longer bonds means “the RBI is now effectively converting its very short term assets into longer-dated bonds in its balance sheet,” Choudhary said.

A spokesman for the central bank didn’t respond to an email seeking comments on the alleged intervention. Short-end yields have been sliding on speculation about RBI’s purchases and Thursday’s move to swap helped 10-year yields slide 17 basis points, the most since October.