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Informist, Thursday, Apr. 3, 2025

 

--Fin min source: Govt, RBI in March decided to end bilateral gilt switches

--Fin min source: Govt-RBI gilt switches undermine transparency efforts

 

By Krity Ambey and Sagar Sen

 

NEW DELHI - The bilateral swap of securities between the Indian government and the Reserve Bank of India is now a thing of the past, with the North Block and Mint Street deciding last month to put an end to the practice. According to a finance ministry official aware of the discussions, the bilateral swap operations undermine the government's efforts to enhance transparency.

 

The decision was made in March when finance ministry and RBI officials met to discuss the Centre's borrowing calendar for Apr-Sept, released on Mar. 27, the official told Informist on the condition of anonymity. The official further said that any switches in the future will be market-based.

 

Bilateral switch operations between the government and the RBI allow the former to retire maturing debt and directly place longer term bonds with the central bank, helping it to smoothen its liability profile. The government has conducted such switches on multiple occasions in the past--although the last of these was in 2023--which have helped it reduce its gross borrowing as the repayment of bonds held by the RBI does not have to be financed through the borrowing programme.

 

The bilateral switch done in January 2023 saw the government buy back INR 226.10 billion of the 6.18%, 2024 bond from the RBI. The government, in return, issued INR 210.26 billion of the 8.28%, 2032 gilt to the central bank. Earlier, just a day before the Union Budget for 2022-23 (Apr-Mar) was to be presented in Parliament, the RBI had disclosed on Jan. 31, 2022 that the Centre had converted bonds maturing in FY23, FY24, and FY25 worth a massive INR 1.20 trillion by conducting a "conversion transaction" with the central bank.

 

Large-scale switches can hurt the RBI's capacity to buy bonds--the central bank is currently in the midst of a string of bond purchases through open market auctions to infuse durable liquidity into the banking system--and the Centre is also in the process of shifting its focus to the debt-to-GDP ratio from the fiscal deficit. As per the latest Budget documents, the Centre aims to lower its debt-to-GDP ratio to 50% by March 2031, with a band of 100 bps on either side. In FY26, the Centre's debt-to-GDP ratio is seen at 56.1%.

 

Of the INR 3.28 trillion worth of gilts scheduled to mature in FY26, market participants estimate around INR 1 trillion worth of papers currently sit on the RBI's books. Finance Secretary Ajay Seth had told Informist in February the government would treat bonds held by the central bank as all other redemptions and that the estimate for gilt switches in the Budget for the current financial year did not factor in any bilateral debt swaps with the RBI.

 

The Centre is set to borrow INR 14.82 trillion in FY26 on a gross basis, with switches estimated to total INR 2.50 trillion. The government conducts bond switches in the open market through auctions on the third Monday of each month.  End

 

Edited by Vandana Hingorani

 

 

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