The debt sale followed the publication of the latest RBI minutes, which showed that its rate-setting panel has turned less dovish with higher inflation. Traders are now bracing for a further steepening of the yield curve, while holding out hope that the central bank will introduce other measures to ease pressure on the bond market.
Borrowing costs have already been advancing, with the new benchmark 10-year bond yield jumping more than 30 basis points in the past three weeks.
The RBI’s debt purchases in the market has tapered in recent weeks. The central bank may be choosing to stay away to make sovereign debt more attractive to investors amid falling real rates.
“The market will hope that Friday’s auction results have finally met the threshold for the RBI to signal something,” said Suyash Choudhary, head of fixed income at IDFC Asset Management in Mumbai. “What is clear is that the market’s auto mechanism is broken now, and a light touch approach won’t work from here on.”