Government bonds with maturity of less than 91 days are unremarkable features in mature markets for public debt. The debt market in the US, where the government is a big debtor, is awash with these ultra short-term bonds. But the key word is mature, which doesn’t apply to the debt market in India. Now that RBI has issued special treasury bills—called Cash Management Bills (CMBs)—with maturities of less than 91 days, and since the government’s debt manager is also the short-term interest rate setter and also the bank regulator, we need to carefully look at the possible consequences of this approach to managing sarkari debt. Note that until last week, about 44% of the government’s huge borrowing target has been met. Debt raising by the government has been heavily front-loaded for the first half of the fiscal year; so this figure is not brilliant. Banks have sackfuls of cash because the credit offtake is low. They also have the stipulation that government papers bought under SLR requirements has to be above 91 days of maturity. So, CMBs offer a good, easy, lazy option for banks. Banks’ preference for short-term securities, including T-bills, has been evident for some time now. Their investment-deposit ratio is 30% on a nominal basis, and close to 90% annually. The spread between one-year paper and ten-year paper has jumped, demonstrating diminishing interest in long-term government securities. So, banks will look at CMBs happily and ask what will be the rate of return. The government offers RBI the repo rate, currently at 4.75%, for its ways and means advances that are used for short-term borrowing. CMBs are an alternative short-term borrowing option. And with heavy use, it will now have an impact on the short end of the yield curve. At this point, the familiar, but ever more important, question about how to spur lending to entrepreneurs comes up. If it looks like the government will have to bear higher costs on its incremental borrowings for the rest of this fiscal, the implications for credit in general should be clear.
On a broader scale, the difference between CMBs circulating in, say, the US and CMBs that will be sold here is that the debt market here is not liquid enough or sophisticated enough. The government debt market in India has seen no innovation because it’s determined by the easy route of placing government securities with captive banks and insurance companies. Outstanding stock of government securities as a percentage of GDP is large and there is no real accountability for the interest cost of the government. Interest cost is the single biggest item of government expenditure. Think this way: the headline inflation rate has fallen by more than 900 basis points from its peak, but borrowing costs have fallen around 100-150 basis points. The people who manage inflation also manage government debt. We need an independent debt management office.