Module: General Practice
Q4: What debt management tool, does the Reserve Bank of India use on behalf of the Government of India, to exchange an existing government security for a new one without making any cash payments?
✅ Correct Answer: C
The correct answer is Switch Auction.
The Reserve Bank of India runs this auction for the Government of India to trade an older government bond for a new one.
Instead of paying back money when an old bond ends, the government lets investors swap it for a new bond that ends at a later date.
No cash changes hands, and the government does not borrow any new money.
The government uses this tool to spread out their debt payments over future years so they do not have to pay back a massive amount of money all in one single year.
This lowers their risk and helps keep trading active in the market.
Investors benefit because they can easily extend their investment and keep earning interest.
The Reserve Bank of India runs these trades on the E-Kuber platform based on market prices.
This process is very different from a Buyback Auction.
In a Buyback Auction, the government pays cash to investors to buy back old bonds and lower their total debt, but a Switch Auction only trades one bond for another.
The Reserve Bank of India runs this auction for the Government of India to trade an older government bond for a new one.
Instead of paying back money when an old bond ends, the government lets investors swap it for a new bond that ends at a later date.
No cash changes hands, and the government does not borrow any new money.
The government uses this tool to spread out their debt payments over future years so they do not have to pay back a massive amount of money all in one single year.
This lowers their risk and helps keep trading active in the market.
Investors benefit because they can easily extend their investment and keep earning interest.
The Reserve Bank of India runs these trades on the E-Kuber platform based on market prices.
This process is very different from a Buyback Auction.
In a Buyback Auction, the government pays cash to investors to buy back old bonds and lower their total debt, but a Switch Auction only trades one bond for another.
🧠 Real-World Scenario:
Imagine The Government has a massive 30,000 Crore loan due today. Suddenly, they realize paying it all at once will drain their budget for hospitals and roads.
According to the rules, they can use a Switch Auction to offer investors a brand new 2035 bond in exchange for ripping up the old 2026 bond. This means investors keep earning interest, and the Government gets 9 more years to pay without spending a single rupee today.