'Premium budget' to retire illiquid securities

The government and the Reserve Bank of India (RBI) is considering to introduce a ‘premium budget’ to retire illiquid securities in the G-Sec market, RBI Deputy Governor H R Khan said.

He explained that the buyback of illiquid securities has been allowed in the past by issuing new securities and for that purpose there was something in the budget on the premium. “Current situation doesn’t permit (that). So we are planning to do something over a period of time, setting aside some budget for these buybacks,” he said delivering the keynote address at the Banking Summit, organised by YES Bank and Financial Times.
“We’ll provide for premium so we’ll try to retire some securities where volumes are low,” he added.  RBI, he said, is working with the government to start a premium budget, which allows the central bank to buy back those illiquid securities by paying premium to the bond holder.

In the G-Sec market, majority of the volume is generated only through trading 2-3 securities like 10-year G-sec among others, while rest of them witness very thin volume.  About stimulus measures announced by the US government, popularly known as QE3, Khan said it will create price pressure on commodities, and may increase country’s imported inflation along with exchange rate volatility.

He added, however, that QE3 would aid global growth, which in turn help the domestic economy. Dwelling on forex risks posed to various entities due to exchange rate volatility, Khan said that country's overseas loan exposures remained unhedged up to 65 per cent as of now. Khan also highlighted the challenges the Indian economy is facing in today’s integrated world, and how banks need to play a major role to better understand and educate their customers on the products and associated risks.

RBI is also contemplating to have a consolidated sinking fund to manage the forex risks of state governments as large part of the CDR requests from the companies is due to forex losses. According to the RBI Deputy Governor who said: "Up to 65 percent of India’s overseas loans have not been hedged." He also said corporates in the country are now truly globalised and it becomes imperative for banks to focus on the risk management policies being adopted by their clients.

Dwelling on volatility in the foreign exchange market, Khan said the RBI will intervene if there is “extreme” volatility in the exchange rate. Although the stated policy of the apex bank is not to intervene in the forex market so that market forces be allowed to determine the exchange rate, Khan still maintained that steps taken to check volatility in the Rupee it(RBI) has taken both tactical and strategic measures.

Meanwhile, the RBI will be reviewing its monetary policy on October 30,  weeks after the government announced a slew of reform measures The steps from the government have given rise to hopes among a few economists that the central bank will respond with a rate cut.