RBI refuses to sell another batch of 10-year bonds at market ask

Auction’s cut-off yield was 6.02%, whereas the 10-yr bond yields closed at 6.04% | Illustration by Binay Sinha
The Reserve Bank of India (RBI) on Friday refused to sell 10-year bonds at the yield demanded by investors, choosing to devolve the benchmark’s auction for the third time in a row instead. 

When underwriters of bonds, mostly primary dealers, are forced to buy the unsold bonds, it is called devolvement.

The central bank had planned to sell Rs 18,000 crore of 10-year bonds on Friday. This was part of the Rs 30,000-crore auction of four bonds. However, the central bank devolved Rs 17,969.891 crore. The other bonds were sold fully.

Of late, any bond other than the 10-year is having a relatively hassle-free auction, but it is the 10-year where the RBI is exercising its will.

This is because the 10-year bond yields are considered the benchmark interest rate signal for the economy, bond dealers say. And RBI’s intent is effectively communicated if the signal is given through the 10-year bonds.

Results of the auctions showed that the central bank wanted the bonds to be sold at a slightly lower yield than the prevailing market yields. The cut-off for the 10-year bond auction was 6.0214 per cent, whereas the 10-year bond yields closed at 6.0420 per cent.

The devolvement, thus, gives a signal that the central bank doesn’t want the yields to rise beyond a particular point. To ensure that yields remain soft, the RBI brought in a number of measures to boost demand for bonds. These include increasing the held-to-maturity (HTM) limit for banks, announcing Rs 20,000 crore of buy/sell open market operations (OMO), and measures aimed at boosting the banking sector liquidity.

However, even after these measures, the central bank has to devolve the 10-year bond auctions, and as the auction results show, for a few basis points difference. 

“Why the devolvements are happening is a mystery to the markets too,” said a bond dealer, requesting anonymity.  

What frustrated the bond market is that the last devolvement happened at a much higher level, at around 6.14 per cent. “The RBI probably wants to keep the yields below 6 per cent, but that seems a difficult ask,” said the bond dealer. 

The RBI’s penchant for keeping yields low is understandable. It has to manage a borrowing programme of Rs 12 trillion for the Centre, and states could pile in by another Rs 10 trillion. Half of the Centre’s borrowing is already done, whereas less than 35 per cent of the state borrowings have been completed. All these borrowings will have to be done at the lowest possible rates.

But it is perhaps more to do with what the RBI perceives the actual borrowings to be and what the market calculates the extra borrowings would be. And there seems to be a clear discord between the two.  

“The RBI is probably weighing in lots of permutations and combinations here. The actual borrowing will be dependent on how much would be the actual fiscal deficit, and how much of OMO purchases/special OMO’s the RBI eventually will have to do,” said Hemal Doshi, vice-president, treasury at SBI DFHI, a primary dealer. 

“The RBI will be guided by its own assessment of inflation and growth and the liquidity requirements of the economy and hence some yield signal would be inevitable,” Doshi said. 

Others in the markets are pretty straightforward in their assessment of the situation. 

“Traders right now are concerned about the large supply amid higher inflation and border tension. But yields can stabilise  if the RBI announces a large OMO calendar before the second-half borrowing calendar,” said Devendra Dash, head of asset-liability management at AU Small Finance Bank.  

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