Debt cost turns low for govt, as RBI pushes for forex chest

The newly elected BJP-led NDA government may not have expected, but it can borrow more from the market at low costs now, courtesy RBI’s push for building forex chest. And, the new government doesn’t even need to worry about fiscal balance getting affected through its borrowing operation.

Debt cost turns low for govt, as RBI pushes for forex chest

The RBI has started mopping up a huge reserve of foreign exchange since March this year.

With the Central Bank buying more dollars, the liquidity (rupee flow) has increased in the currency market.

It has resulted in two things:

  • Banks have also mopped up easy rupee stock (liquidity)
  • Reduction in bond yields (debt at low cost)

With this banks are in a position to purchase more of government papers/ bonds as interest cost and yields have fallen considerably. The yields have fallen from around 8.78 per cent to 8.70 per cent on benchmark 10 year government bonds.

This has helped the government to pay less to the buyers of government paper in form of interest.

It would be no exaggeration to say that the result brings a lot of positives both for the RBI and government.

The bond-yields are low, foreign reserves are rising and liquidity situation has improved significantly in the past few months or such.

Foreign investors have put in about $ 4.5 billion in the month of May and forex reserves have risen by $11 billion in the fiscal year 2014-15.

Even short term Treasury Bills are down by 20 basis points, commercial deposit rates and corporate bonds (yields) by 20 basis points.

With money markets very robust, the new Finance Minister Arun Jaitley has nothing much to worry if he plans to borrow from market. However, as per market experts, he may not be in a hurry to begin with borrowing operations in the first half. Though, in second half, government may feel the need to borrow, if at all.

Ashish Pandey

I am a business and finance journalist who is currently employed at Financial Express and previously at Zee News. My areas of interest include business and foreign policy. You can reach me on Twitter at @ashuvirgo1984 or @eFundsPlus.

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