The Reserve Bank of India (RBI) announced plans for a huge buyback worth Rs 40,000 crore of government securities on May 9, 2024, to alleviate tight liquidity conditions owing to restrictions on government spending due to electoral guidelines. This marks the first of similar repurchases since 2018. The buyback involves three securities, including 6.18% GS 2024, 9.15% GS 2024, and 6.89% GS 2025 which were originally meant to mature on November 4, 2024, November 14 and January 16, 2025. As these securities were scheduled for maturity soon, the surprise buyback means a move to alleviate liquidity constraints
Government securities (G-Secs) are bond instruments acknowledging a government's debt obligation, which can be in the form of short-term treasury bills or long-term bonds. G-Secs are typically long-term and practically have no risk of default.
The buyback government announced is a multiple-price auction method, where the successful bidders are required to pay for the allotted quantity of securities at the respective price or yield at which they have bid. There is no notified amount for the individual securities within the aggregate ceiling of Rs 40,000 crore. Offers must be submitted in electronic format on the RBI Core Banking Solution (E-Kuber) system by May 9, 2024, with results announced on the same day and settlement scheduled for the next day.
The government also announced it retains flexibility in determining the buyback quantum, which can be more or less than the Rs 40,000 crore announced. It also reserves the right to "accept or reject any or all of the offers, either wholly or partially, without assigning any reason thereof," the release said.
Buybacks are part of Open Market Operations (OMOs) conducted by the RBI to buy G-Secs to adjust market liquidity. When liquidity in the market is high, the RBI sells securities to absorb excess rupee liquidity. Conversely, in tight liquidity conditions, the RBI will buy G-Secs to inject liquidity into the market. Banks being major holders of government bonds, will see more liquidity in the banking system with the buybacks.
The buyback or repurchase of G-Secs means the government is redeeming existing securities prematurely from the holders. With a buyback, the government may aim for a reduction of cost (by buying back high coupon securities), a reduction in the number of outstanding securities and improving liquidity in the G-Secs market (by buying back illiquid securities) and infusion of liquidity in the system. State Governments have the option to buy back their high coupon-bearing securities that come with high-interest outflows during times of falling interest rates. The buyback process can be carried out through an auction process, generally for large amounts, or through the secondary market route, i.e., NDS-OM, for smaller amounts.
