RBI’s G-Sec buyback offers in May see tepid response

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The Reserve Bank of India (RBI) has received a tepid response to its government bond buyback offers throughout May, highlighting a disconnect between the central bank’s intentions and market sentiment.

The buyback offers were announced in the backdrop of the government’s solid cash position (April 2024 net GST collections were at ₹1.92-lakh crore). This coupled with dividend declaration by RBI may have prompted it to go in for buyback of G-Secs. In a bid to proactively manage its debt and alleviate future repayment burdens, the government aimed to utilise its cash surplus to retire some of its debt ahead of schedule.

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However, the market’s reception has been lukewarm. The RBI had planned to repurchase ₹2-lakh crore worth of bonds in May, but the actual acceptance fell drastically short. Only approximately ₹23,000 crore or 11.5 per cent of the total offering, was accepted, reflecting the subdued interest.

Lacklustre interest

Market analysts note that investors prefer a reduction in short-term bill issuance as a more attractive alternative to the buybacks, especially given the current lackluster interest. Banks are reluctant to sell their holdings at a loss, having purchased these securities at higher prices previously. Consequently, they aim to sell bonds at elevated prices or reduced yields to maximise profits, leading to minimal participation in the buybacks.

The first buyback held on May 9 saw the RBI repurchasing government bonds worth nearly ₹10,513 crore against the notified amount of ₹40,000 crore. Similarly, in the second buyback on May 16, the RBI accepted bids worth only ₹2,069.99 crore against the notified amount of ₹60,000 crore. The lack of enthusiasm continued in subsequent buybacks, with the auction on May 21 also seeing low participation, where ₹10,512 crore worth of bonds were repurchased against the same notified amount. The latest auction on May 30 for ₹40,000 crore concluded with RBI accepting offers for ₹5,111 crore.

Bond market traders attribute this tepid response to the banks’ hesitation to incur losses on securities bought at higher prices. As the RBI navigates these challenges, the government will need to reconsider its strategy to efficiently manage its debt and market operations, said experts.