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Charts & Analysis

RBI Sells 150K cr. of Government Bonds So It Can Buy Dollars. And That’s a Good Thing.

From Jun 2014, RBI has sold about 150,000 cr. of government bonds it holds, and has instead replaced them with dollars.


(This is a split graph, with Govt Bonds on the left axis and Forex reserves on the right axis)

You will find that from mid-may – in fact, after election results, the RBI has puchased about Rs. 2 trillion worth of dollars. (200,000 cr. of dollars)

It has, at the same time, sold Rs. 150,000 cr. worth government bonds.


Our guess is that it is to contain inflation. When the RBI prints to buy dollars, it increases money supply. Money supply expansion causes inflation in the longer term.

In the past we never bothered about that. When we bought dollars like crazy, we continued to buy government bonds as well. “We” because the RBI balance sheet is effectively the monetary balance sheet of the Indian public.

This expanded money supply like crazy. We first saw a mad 20% money supply expansion in 2001 to 2008. Most of this was because of an increase in dollar reserves. The holding of rupee bonds didn’t increase that much.


We’ve also seen a crazy 15% expansion in the RBI balance sheet between 2010 and 2014.But this time, it’s been because of a crazy increase in BOTH areas – rupee bonds and dollars.

This year, though, since April, the RBI has been selling bonds in the open market, while adding dollars. This has reduced the expansion of the balance sheet somewhat, though it still remains expansionary.


This, we think, is a good thing because it cuts monetary inflation, but they have to be more aggressive about selling bonds. Some of the bond sales in April and May were “automatic”; when the government had to pay up for maturity of bonds that added up to 75,000 cr. or more in April and May, RBI owned a good number of those bonds and effectively they sold those bonds.

But since June, the bond maturity amounts are miniscule, so RBI would have actually sold bonds in the open market.

(When the RBI prints rupees to buy dollars, it expands money supply. When it sells government bonds, the rupees it gets in return will go out of circulation. That contracts money supply).

This is an interesting macro-development. Because till now, FIIs were buying rupee bonds. And bringing in dollars. RBI built reserves. For the last few days they have been buying dollars and taking them out, while selling rupee bonds.

Will the RBI now reverse its June-July position? The rupee has gone to Rs. 61.5 today, and the 10 year is at 8.64% (yields up from 8.4% two weeks back). We’ll keep you posted!

  • Dheeraj says:

    Has the RBI actually said somewhere that they’ve actively sold government bonds?
    I think you’ve got the cause and effect in reverse order.
    It isn’t RBI actively selling government bonds. It’s just a natural effect of liquidity infusion due to RBI’s dollar (or forex) buying.
    When RBI buys dollars, liquidity is injected which means that liquidity requirement of banks eases (which is what we’ve observed, of late).
    Consequently banks borrowing from RBI’s daily LAF window reduces. So they do not tender securities as collateral (or they tender lesser amounts). This leads to a reduction in government securities holdings on RBI’s balance sheet.
    (Remember, securities tendered as collateral against LAF borrowing ends up as government bonds on RBI’s balance sheet)
    I don’t think RBI has been consciously selling large amounts of government bonds in the market. Ideally if they do this, they should do it through an OMO, but we know that’s not necessarily the route that they may take.
    Still, I think in this instance it’s just a consequence of reserve build up.

  • trader says:

    I think the RBI has changed the way it publishes bond holding data and the drop in bond holdings has to be seen in alongside LAF and Term Repo holdlings.

    • Like I said to Dheeraj, LAF+Term Repo on April 4 was 76K cr. on April 4 and was 93K cr. on Jul 25. At the very least, the g-sec holdings should have increased.
      RBI hasn’t changed the way it published bond holding data AFAIK. Have been trackign this for a while. Can you elaborate?

  • Leo says:

    now the real panic is about to start INR will be hitting new all time lows and yields will be popping above 9% to pop the modi bubble…
    central banks are failing around the world including the RBI …money supply debt expansion….people are euphoric that modis magic wand …time to test the theory has come 61.65 inr will zoom to 64.5
    keep a close watch on yields

  • Newbie says:

    Whats your take on the effects on Indian Debt and Equity market when Interest Rates begin to rise in US ?
    Love to read your prediction on this.

  • Shash says:

    (Long term) Interest rates won’t rise in the U.S. 10 Year Treasury yield below 2.0% by year end 😉