RBI cancels bond auctions for second week in succession

The RBI in its circular stated that the government bond auctions worth Rs.24,000 crore for the week ending on 18-February was being cancelled. This comes just a week after the previous week’s auctions of government bonds worth Rs.24,000 crore were also cancelled by the RBI.

For the fiscal year FY22 so far, the government has already cancelled bond borrowing programs worth Rs.54,000 crore with, just 2 more bond issues to come.

For FY22, the government has already cut its borrowing target from the original estimate of Rs.12.06 trillion to Rs.10.47 trillion. While this does make the FY22 borrowings look better, it also makes the rise in borrowings for FY23 look magnified.

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The FY23 borrowing target stood at Rs.14.95 trillion. It was already 24% higher YoY over the original estimates. With the revised estimates at Rs.10.47 crore, FY23 borrowings are likely to be 42.8% higher.

There is a piquant situation that the latest budget created for the bond markets. For example, the higher borrowing target and the higher yields in the bond market, have made it tough for the government to raise funds at competitive rates.

The RBI wants to raise funds on behalf of the government at a much lower rate but that is not finding too many buyers among investors. That explains why the last two rounds of borrowings were called off.

When there is not enough demand, there are two options. Firstly, the RBI can choose to reduce the borrowing based on the quality of bids. However, when such attempts by the government tend to get cancelled time and again, it pushes up the bond yields and makes the job tougher for the government and the RBI. Bond yields are spiking and the government doers not want to pay higher yields.

The second option is to just let the unabsorbed borrowing targets devolve on the RBI. That is again not a very preferred scenario. Devolvement on the RBI is same as printing of fresh money and hence has an inflationary impact on the economy.

That is the reason, devolvement on the RBI is always kept as an exception not as the rule. The liquidity impact on inflation can be quite large and serious.

The purported reason state by the RBI was that the decision to cancel was taken based on the existing cash balances with the government which is currently in excess of Rs.3.75 trillion. However, that is just the ostensible reason with the real reason being that there is no sync between what the market expects and what the government is willing to offer as yields to the investors in debt. Bond yields have already spiked by 46 bps in year 2022.

Indian banks have substantial reserves and scope for further absorption of government bond issuances. That leaves the question of who will bell the cat and how the cat will be belled. For now, the question mark over the Rs.14.95 trillion debt target for the fiscal year 2022-23 still remains a big challenge.