Will govt look at early retirement of bonds?

The government and the banking system are faced with a contrasting problem—liquidity!

While banks are fretting about the cash crunch, the government is sweating over the deployment of the cash bonanza it received from sale of spectrum for third generation telecommunications and broadband wireless access.

Both parties agree the problem is only short-term.
Banks expect liquidity to improve with government expenditure.
The government has said it won’t spend out-of-turn just because it has got huge inflows.

The government has also said it isn’t looking at some longer-term measures like pruning fiscal deficit or slashing market borrowing at this juncture.

At the current juncture, an option it can consider is advancing the upcoming redemption of a few bonds.

In other words, it would mean buying back of soon-to-mature bonds.

Finance ministry officials told NewsWire18 that this option is not off radar.

On July 2, Rs 15,515 crores of the 12.25%, 2010 bond is slated for redemption, while on July 28, Rs 34,000 crores of the 11.30% 2010 bond is due.

Although these bonds haven’t been traded in the recent past, their valuation was set at Rs 100.31 or 5.80% and Rs 100.63 or 5.82%, respectively, by Fimmda, the self-regulatory organization of dealers.

The government may have to purchase these papers at a discount instead of at par that it pays on retirement.

So far, the government hasn’t purchased bonds on its own account to retire bonds. State governments have, at times, purchased bonds from the market to lower their borrowing costs.

The last time the central government purchased bonds was in 2003, when it engaged in switch deals to retire high-coupon bearing securities.

It issued liquid securities in lieu of the papers it purchased. It had paid a premium for these purchases, which added to the fiscal deficit.

Banking industry officials said the exercise was not successful, as banks were reluctant to part with their high-paying bonds.

An early redemption of securities can help the government buy back the bonds at a discount.

The government’s surplus cash is re-invested the Reserve Bank of India in government securities temporarily, and the interest earned is credited to the government.

If government buys back the bonds from the market at a discount, it will make some earning from its surplus cash.

The specifics and the other modalities of bond buyback, if any, could not be ascertained from officials of either the government or the RBI.

Finance ministry sources said the other options on the table include cancellation or pruning of a scheduled borrowing.

As they did in June, they may continue to borrow less through Treasury bill issuance in July.

The government is issuing only Rs 3,000 crore of T-bills each week, as against Rs 7,000-8000 crores of bills issued each week last month.
NW18