In January 2022, the government converted with RBI, Rs.1.2 lakh crore worth of government securities and oil bonds maturing in next 3 years with bonds of longer maturity. Which of the following is correct regarding oil bonds?

Solution

Oil bonds are special securities issued by the government to Oil Marketing Companies (OMCs), as compensation to these companies in lieu of cash subsidies. These securities are usually long dated securities and carry a marginally higher coupon over the yield of the dated securities of comparable maturity. These securities are not eligible as SLR securities but are eligible as collateral for market repo transactions. Note - These bonds were issued to OMCs by India between 2005 and 2010 in lieu of cash at a time when the government used to fix fuel prices. Petrol and diesel prices were fixed by the government to cushion consumers from price shocks. In June 2010, petrol prices were deregulated, mirroring the market price of crude and the oil bonds were discontinued. However the previously issued oil bonds are to be serviced till redemption.