Interest in G-sec market rising

The Public Debt Management report for July to September 2022 has been released showing growth in the G-sec market by 8.64% in Q2 quarter from the last Quarter (Q1) of April to June 2022-23.

Details of the report:

• Released by: The Budget Division of the Department of Economic Affairs, Ministry of Finance.
• Points discussed:
  • Trading volumes in government securities (g-secs) hit a two-year high of Rs 27.67 lakh crore in the July to September quarter (Q2) of 2022-23, rising 8.64% from Q1, with the Finance Ministry terming this a sign of growing market interest in such bonds.
  • The higher trading volume in Q2 of 2022-23 in comparison to the previous quarter shows the growing interest of market players/ traders in the government security market.
  • In terms of ownership, Government of India bonds owned by the RBI fell to a two-year low of 15.3% in Q2.
  • This was also the first time in seven quarters that RBI-owned bonds have slipped below 16% of outstanding dated GoI securities. 

How they are used by the Central Bank?

• Open market operations are conducted by the RBI by way of the sale or purchase of government securities (g-secs) to adjust money supply conditions.
• The central bank sells g-secs to suck out liquidity from the system and buys back g-secs to infuse liquidity into the system.
• These operations are often conducted on a day-to-day basis in a manner that balances inflation while helping banks continue to lend.
• The RBI uses Open Market Operations (OMO) along with other monetary policy tools such as repo rate, cash reserve ratio and statutory liquidity ratio to adjust the quantum and price of money in the system.
• The Reserve Bank reserves the right to decide-
  • on the quantum of purchase/sale of individual securities
  • accept bids/offers for less than the aggregate amount
  • purchase/sell marginally higher/lower than the aggregate amount due to rounding-off
  • Accept or reject any or all the bids/offers either wholly or partially without assigning any reasons.

Significance:

• Smoothens the availability of money: In India, liquidity conditions usually tighten during the second half of the financial year (mid-October onwards).
  • This happens because the pace of government expenditure usually slows down, even as the onset of the festival season leads to a seasonal spike in currency demand.
  • Moreover, activities of foreign institutional investors, advance tax payments, etc. also cause an ebb and flow of liquidity.
  • However, the RBI smoothens the availability of money throughout the year to make sure that liquidity conditions don’t impact the ideal level of interest rates it would like to maintain in the economy.
• Liquidity management: Liquidity management is also essential so that banks and their borrowers don’t face a cash crunch.
  • The RBI buys g-secs if it thinks systemic liquidity needs a boost and offloads them if it wants to mop up excess money.