The six-week national election is having a negative impact on government spending, even in spite of robust tax collections, therefore India’s central bank is intervening to relieve banking system liquidity circumstances.
The national elections in India will take place on April 19 and end on June 1. The results will be tallied on June 4.
In order to inject money into the financial sector, the government announced on Friday that it would be buying back bonds worth an unexpected Rs 40,000 crore. On Monday there was a 3-5 basis point decline in the yields on bonds with a 2–5 year maturity. Longer-term rates decreased as well.
According to a person acquainted with the government’s thinking, the buyback of assets is a tool for injecting liquidity and will help to ease systemic liquidity.
“The buyback announcement could be an exercise to infuse liquidity because we have an interim budget and the general election, so the government expenditure is lesser than usual,” Gaura Sen Gupta, India economist at IDFC FIRST Bank stated.
“This year, April-June spending would be significantly lower than that due to elections,” she added.
