SBI has said RBI will need innovative steps to isolate government loan plan from impact of Ukraine
Bombay:
According to a report by the State Bank of India (SBI), the ongoing war between Russia and Ukraine could hamper the government’s lending program in the next fiscal year as markets feel the itch to develop.
The report, authored by Soumya Kanti Ghosh, the chief economic adviser to the SBI group, said the Reserve Bank of India (RBI) can mitigate the economic impact of the ongoing conflict on the loan plan by adopting some innovative measures.
Following the ongoing market chaos in the aftermath of the war, the government quickly made it clear that it is unlikely to borrow in March, as runaway crude oil prices have pushed US interest rates down, which in turn domestic interest rates rose, leading to increased interest expenditure on the nearly Rs 81 lakh crore of outstanding government debt.
In addition, the RBI has a myriad of unconventional tools to manage government loans over Rs 14.3 lakh crore in 2022-23 and it is important that the debt market understand such nuanced undertones and not go into a frenzy as it is currently swirling with crude prices that threaten to rise above $120, Mr Ghosh said in the report.
According to him, the RBI can proceed with the proposed loan by leveraging all plausible alternatives within the framework through a “dumbbell” strategy, also known as a “barbell” investment strategy. This includes buying a combination of short-term and long-term bonds to provide the flexibility of short-term bonds in addition to the typically higher yields associated with longer-term bonds.
Mr Ghosh suggested many steps, including holding an auction of government securities (G-secs) twice a week instead of the current practice of weekly auctions, not preloading the same thing by stretching it out more or less evenly across the four quarters and short-term auctions to mix treasury bills (T-bills) with medium- and long-term issuance and the government for its part, which provides an impetus to, among other things, small savings.
The RBI should explore a higher share of T-bills in the loan spreadsheet across all three maturities by clearing a significant additional amount under the T-bills route in all weekly auctions without disrupting the balance, with a range of Rs 1,500 -2,500 crore higher accretion per week as market need and liquidity conditions are in sight, the SBI economic adviser suggested.
The government can try to give a boost to small savings schemes. In particular, it could give the Sukanya Samriddhi Yojana (SSY) a hard push by encouraging new registrations in a mission mode, allowing for one-time registrations for all remaining cases for up to 12 years, he added.
The RBI can issue papers by matching the redemption profile of treasury bonds. Ideally, papers up to 7 years in the short-term segment, 10-15 years in the mid-range and longer than 15 years in the long-term segment could be the ideal mix to meet the credit needs of market players, according to the report.
