RBI Policy | Jumping the gun by talking of open market bond buying: Deputy Governor Rabi Sankar

The central government plans to borrow a record amount through the issuance of bonds in 2023-24.

It is premature to think that the government bond market needs support from the central bank through open market purchases, believes the Reserve Bank of India.

"I think we are jumping the gun talking about OMOs (open market purchases) and all at this point in time," Deputy Governor T Rabi Sankar said on February 8 in the post-policy press conference. "Market borrowing last year was considered high and it was managed smoothly. It will be managed smoothly this year too."

The Centre plans to borrow a record Rs 15.43 lakh crore in gross terms in the next financial year, up from Rs 14.21 lakh crore this year, according to the Union Budget 2023-24, tabled last week. In net terms, the Centre's borrowing plan for the next year has been pegged at Rs 11.81 lakh crore.

Despite the Centre's borrowing numbers being broadly in line with expectations, market participants expect the RBI to step in sometime during 2023-24 and support the government bond market by way of open market purchases of bonds. This is more so because of the tightening of financial conditions in the economy with surplus liquidity in the banking system reducing over the last few months.

Open market purchases, or OMO purchases, involve the central bank buying government bonds from private players, which infuses additional liquidity and props up bond yields.

"We expect sovereign yield curve to steepen in FY24 amid demand-supply dynamics on the long-end. Credit spreads are also expected to widen gradually in FY24 amid continued growth in credit offtake and adverse liquidity conditions in global markets for fund raising," Edelweiss Mutual Fund noted.

Deputy Governor Rabi Sankar, however, believes that there is enough appetite for government bonds.

"There is adequate demand, the markets are deep enough. So I think we should not have any problems irrespective of the liquidity conditions... We are fairly confident that there won't be any problem in mobilising government borrowings this year," he said.

The government's benchmark 10-year bond was trading at 7.35 percent at 1:50pm on February 8, down from 7.31 percent, at close on Tuesday.