Short term borrowings are a part of any company’s life. These are needed to tide over temporary cash shortages or even to meet normal working capital needs. Since the needs are temporary, companies do not mind paying a slightly higher rate of interest. But when governments start dipping into the till to meet short term requirements, the consequences can be interesting, if not disruptive.
The Indian government has announced that after consulting its banker, the Reserve Bank of India, it proposes to issue cash management bills. These bills will be used to tide over temporary cash flow mismatches of the government. They will be non-standard discounted instruments that will resemble treasury bills (T-bills). But their maturity will be less than 91 days while T-bills have a minimum maturity of 91 days.
The bills will be issued at a discounted rate determined through an auction. The RBI will announce the auction a day in advance. These bills can be traded and are also eligible for the ready forward facility, in which banks borrow money from the RBI against eligible instruments. They will also be eligible for the SLR requirements of banks. These features greatly enhance their marketability and will also see a creation of a new market in these instruments. There is one differentiator between these bills and T-bills; there will be no non-competitive bidding for these bills (which means retail investors cannot buy these bills in the manner they can buy T-bills).
How will this affect the money market? Will banks flock to park money in these securities, as they will offer safe returns, at perhaps attractive rates? Will these bonds become the new trend setter for short term interest rates? Will companies find themselves squeezed out of the short term market or will the government keep a low profile? Will banks looking to raise short term funds find themselves competing with the government? These must be some of the questions confronting money managers.
Why is the government issuing these bills? The government has been facing pressure on the revenue front even as it has gone all out with a Budget that seeks to spend more and not less. Revenues will take some time to recover, as industry gradually limps back to normalcy. Meanwhile, a drought is facing many of the rainfed regions of the country. Even as it has extended itself with its expenditure proposals in the Budget, it will be stretched further if the drought is a really bad one. What is not clear is why it anticipates short term cash mismatches.
Read a Reuters story on this development.