On 2nd March 2016 bonds worth Rs 373 billion maturing in 2016-17 and 2021-22 were switched by RBI from its own account to longer maturity 2023-24 and 2024-25 bonds with the government. The switch was as per the budgeted target of Rs 373 billion (revised down from Rs 500 billion) for the fiscal year 2015-16. The target for switches for fiscal year 2016-17 is Rs 750 billion.
On 20th March 2015 bonds worth Rs 302.28 billion maturing in 2015-16 were switched by RBI from its own account to longer maturity 2026-27 bonds with the government.
The government is facing a heavy bond maturity calendar over the next four years. Government bonds worth Rs 9.73 trillion are maturing over the period 2016-17 to 2019-20. Given that the government does not generate budget surplus to bring down debt, it has to borrow to pay bondholders. Hence, the government has to borrow extra Rs 9.57 trillion over and above its fiscal deficit borrowing over the next five years.
The bond market may not be able to absorb such high borrowing given that banks, that own 43% of total outstanding government bonds, have seen a cut in SLR from 25% of NDTL to 21.5% of NDTL over the last few years. Bank deposit growth has also slowed down from over 15% levels to levels of around 11.5% and banks may not have appetite to roll over their bond holdings. Read RBI Regulations for SLR and NDTL definitions.
The government, in order to bring down the pressure in financing such bunched up maturities, is undertaking a Debt Switch program where it will buy back bonds maturing in the years 2015-16 to 2018-19 and replace them with bonds that mature later than 2025. How does this work?
Let’s take an example. LIC holds Rs 50 billion of 7.38% 2015 government bond maturing on the 3rd of September 2015. The government does a debt switch with LIC, where it buys the Rs 50 billion of 7.38% 2015 bond from LIC and sells Rs 50 billion of 8.60% 2028 bond to LIC. In effect, this debt switch will lower by Rs 50 billion, the redemption pressure on the government, when the 7.38% 2015 bond comes up for repayment on the 3rd of September.
The debt switch has no impact on the government’s and LIC’s cash flows except for the difference between the price at which it buys back bonds from LIC and the price at which it sells bonds to LIC. The debt switches are done at market price as of the switch date. In the example above, if government bought 7.38% 2015 bond at Rs 100 and sold 8.60% 2028 bond to LIC at Rs 107, the price difference of Rs 7 will be a net inflow to the government and net outflow for LIC.
Debt Switches and Repurchase done till date
On 2nd March 2016 bonds worth Rs 373 billion maturing in 2016-17 and 2021-22 were switched by RBI from its own account to longer maturity 2023-24 and 2024-25 bonds with the government. The switch was as per the budgeted target of Rs 373 billion (revised down from Rs 500 billion) for the fiscal year 2015-16. The government has bought back securities worth Rs 386 billion in fiscal 2015-16.
In Budget 2013-14 and Budget 2014-15, the government announced a debt switch of Rs 500 billion in each of the budgets. In fiscal 2013-14, the government switched bonds maturing in 2014-15 and 2015-16 with institutional investors for face value of around Rs 390 billion to longer tenor securities during the months of January and February 2014. Over and above the switches, the government also bought back securities (with cash surplus) amounting to Rs 155.90 billion in March 2014 to smoothen the maturity profile of outstanding dated securities in 2014-15. Buying back of securities extinguishes the bonds and the government will have not have to fund the bonds when they come up for maturity.
In fiscal 2014-15 the government bought back bonds (with surplus cash) amounting to Rs 188 billion in September 2014, of which Rs 125 billion has already matured.In March 2015 bonds worth Rs 302.28 billion maturing in 2015-16 were switched to longer maturity 2026-27 bonds.The government has switched a total of Rs 608.28 billion in fiscal 2014-15 apart from buy backs.