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Published: May 17, 2024
Updated: May 17, 2024

RBI's Bond Buyback Faces Resistance from Banks, Yields Only Rs 2,069 Crore

Limited Success in Bond Buyback

The Reserve Bank of India (RBI) managed to repurchase only Rs 2,069 crore worth of government bonds out of a notified amount of Rs 60,000 crore, as banks resisted selling the securities at a loss. This marks the central bank's second attempt to infuse liquidity into the banking system, which faced limited success due to the higher prices demanded by banks.

Previous Auction and Current Offers

In a previous auction on May 9, the RBI had accepted bids worth Rs 10,512.99 crore out of the Rs 40,000 crore worth of bonds offered for buyback. During the latest auction, the government offered to buy back three types of securities: two maturing in six months and one in eight months.

The securities offered were:

● 6.18% GS 2024, maturing on November 4, 2024
● 9.15% GS 2024, maturing on November 14, 2024
● 6.89% GS 2025, maturing on January 16, 2025

Details of the Auction

The central bank received 24 offers worth Rs 26,877.161 crore for the 6.18% GS securities but accepted only six offers worth Rs 552.999 crore at a cut-off price of Rs 99.61. For the 9.15% GS securities, the RBI received 12 offers worth Rs 6,479.791 crore but accepted just two offers worth Rs 1,513 crore at a cut-off price of Rs 100.98.

Challenges in Acceptance

According to VRC Reddy, treasury head at Karur Vysya Bank, overall participation in these securities was low as banks held them at higher costs. The central bank's acceptance of bids only at Financial Benchmarks India Private Limited (FBIL) levels, which administers financial benchmarks including interest rates, further complicated the situation. Accepting the higher prices demanded by banks would have significantly lowered yields for these securities, a move the RBI was hesitant to make to avoid front-running monetary policy actions.

Expert Opinions

A dealer from a private bank quoted in a Reuters report indicated that the RBI's rejection of most bids suggests discomfort with allowing yields to influence monetary policy actions prematurely. The central bank's cautious approach highlights its focus on maintaining control over financial benchmarks and interest rates.The RBI's bond buyback program faced significant resistance from banks, resulting in limited success. Despite attempts to infuse liquidity, the central bank's careful approach in managing yields and maintaining control over monetary policy actions led to the acceptance of only a fraction of the offered securities.