India to Buy Back $2.1 Billion of Debt Tomorrow to Boost Cash

June 17 (Bloomberg) -- India will buy back 100 billion rupees ($2.1 billion) of government securities through an auction tomorrow to boost cash in the financial system.

The government will buy the bonds through a multiple price-based “multi-security” auction, The Reserve Bank of India said in an e-mailed statement yesterday. The auction tomorrow is part of the government’s plan to buy as much as 200 billion rupees of debt in one or more tranches, it said.

Overnight interbank rates climbed to as much as 5.4 percent yesterday from 4.9 percent at the end of May. Banks borrowed an average 375 billion rupees a day from the central bank through its repurchase-auction window this month, indicating a shortage of cash after license-fee payments by phone companies. Last month, they lent a daily average of 328 billion rupees of surplus to the central bank.

“It’s a short-term measure to address a temporary tightening in liquidity and will help infusing confidence among investors,” said Srinivasa Raghavan, head of fixed-income trading in Mumbai at IDBI Gilts. The yield on the benchmark 10- year bond may drop as much as 10 basis points today, he said.

The yield on the 7.80 percent note due May 2020 dropped seven basis points yesterday to 7.59 percent as of the 5:30 p.m. close in Mumbai, according to the central bank’s trading system.

The finance ministry will tomorrow repurchase the 12.25 percent notes maturing in 2010, 11.3 percent securities due 2010 and 6.57 percent debt maturing 2011, it said in the statement.

Cash availability has dropped after the government raised 677.2 billion rupees from last month’s auction of mobile-phone permits prompting the central bank to ease bond reserve requirement rules until July 2.

Wireless License

The central bank said lenders can raise more cash by cutting their debt holdings by as much as 0.5 percentage point below the minimum regulatory requirement of 25 percent of deposits. The Reserve Bank is also holding additional daily money-market auctions to increase the availability of funds.

The government is also raising a combined 385.4 billion rupees from winners of wireless broadband licenses by June 22. Companies may pay up to 350 billion rupees in quarterly tax this week, said Pradeep Madhav, managing director of Mumbai- based Securities Trading Corp. of India last week.

The Reserve Bank, whose next policy meeting is scheduled on July 27, has raised interest rates twice since mid-March, by a quarter-percentage point each time. The reverse-repurchase rate, or the rate at which the central bank absorbs surplus cash, is 3.75 percent, while the repurchase auction rate is 5.25 percent.