The Reserve Bank of India (RBI) has responded to tight liquidity conditions in the banking system by announcing a significant reduction in the government's treasury bill sales and introducing a new selection of bonds for the Centre's buyback operations.
About Bond Buyback:
It is a process whereby the central government and state governments buy back their existing securities, by redeeming them prematurely, from the holders.
Bond buybacks is a liability management tools widely used in government securities markets to manage refinancing and liquidity risks.
It enables issuers to retire an outstanding debt before its maturity date against a cash payment.
The objectives of buyback can be
Reduction of cost (by buying back high coupon securities),
Reduction in the number of outstanding securities and improving liquidity in the G-Secs market (by buying back illiquid securities) and
Infusion of liquidity in the system.
What is a Bond?
It is a debt instrument in which an investor loans money to an entity (typically corporate or government) which borrows the funds for a defined period of time at a variable or fixed interest rate.
Bonds are used by companies, municipalities, states and sovereign governments to raise money to finance a variety of projects and activities. Owners of bonds are debt holders, or creditors, of the issuer.
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