The Reserve Bank of India (RBI) is letting the 10-year bond yield
align with market realities, ahead of its monetary policy next week.
This is a different strategy than what played out until last month, where the central bank seemed more focused on keeping the 10-year bond yields at 6 per cent. The logic given by senior executives at that time was that the 10-year bond has more impact on the entire yield curve and so the focus could be disproportionately higher on the side of the 10-year bond.
However, bond dealers say that line of action may have ended with the last benchmark 10-year bond, most of which ended up landing in the books of the RBI due to intervention.
The 10-year bond yields closed at 6.204 per cent on Friday. The new 10-year was launched on July 9 at 6.10 per cent, which itself was a high coupon offered to the market.
At the start of the month, the yield on the older benchmark was at 6.039 per cent. As bond prices fall, yields rise, and vice versa.
“The 10-year bond was trading at a premium earlier (yields were lower) due to RBI intervention. With little intervention RBI is now allowing 10 year to readjust with the yield curve,” said Debendra Dash, senior vice president at SU SFB.
With this, the 10-year bond has again garnered trading volume in the secondary market. The new benchmark is the third-most traded security in the bond market, whereas the last benchmark was barely getting traded as the sixth most. The outstanding against the latest benchmark is just Rs 28,000 crore. As more bonds are issued on the paper, the 10-year bond should be back as the most traded security in the market, bond dealers say.
Light intervention warns speculators, and at the same, helps the bond market reflect a true picture of the economy, said bond dealers. But economists say the tension between the market and the RBI would continue as both would try to test each others’ tolerance limit.
“Yields are calibrating with the domestic growth-inflation dynamics, which is healthy. Though the global yields are reasonably benign, the resurgence of covid cases is an important factor to watch for,” said Soumyajit Niyogi, associate director of India Ratings and Research.
However, the rise in yields ahead of the policy puts some pressure on the RBI. It wants to keep yields low to aid the government borrow at a cheap rate, but at the same time, it has to keep the domestic investors happy at a time when the global investors are withdrawing their debt investment from India. Since FY19, foreign investors have been net sellers of Indian debt.
The bond market, therefore, will keenly watch the policy measures that the RBI would introduce in the policy next week. Generally, a liquidity normalisation measure would be bond market negative, said dealers.
“On both foreign exchange and G-Sec yield levels, the stated line of the RBI is that they let market forces play out, only that movements should be orderly. In G-Sec primary auctions lately, we are not seeing as much of devolvements or cancellations as we have seen earlier,” said Joydeep Sen, consultant fixed income at Phillip Capital.
Earlier, the RBI sometimes refused to sell bonds. But recently, it is devolving the bonds on the primary dealers. Which means underwriters of the auctions are being sold the bond, instead of selling it directly to bidders. These bonds end up coming back to the market.
On Friday’s auction, the RBI devolved Rs 7,465 crore of the benchmark 5-year bond, out of Rs 11,000 crore on offer. Overall, in the auction, the RBI raised Rs 35,000 crore from the market.
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