Reserve Bank loosens grip on yields at auction to leave traders guessing

Rising yields at India’s latest government bond auction are signaling the central bank may be reluctantly accepting higher borrowing costs amid a global rout.

The Reserve Bank of India sold some of 10-year debt at 6.22 per cent on Friday, compared with about 6 per cent in previous auctions. That’s after a spike in U.S. Treasury yields and oil prices pushed borrowing costs higher globally.

"The RBI has allowed yields to adjust higher due to global reflationary pressures," said Shailendra Jhingan, chief executive at ICICI Securities Primary Dealership Ltd. "They are allowing an orderly evolution of the yield curve without any fixed target where yields should be."

Standard Chartered Plc. sees yields on the 10-year bond climbing to 6.60 per cent by end-December, while ING Bank NV expects it to rise to 6.50 per cent.

With the reflation trade striking in full force amid a surge in commodity prices, and higher U.S. Treasury yields, central banks are facing challenges in keeping borrowing costs in check amid nascent economic recovery. The RBI has sought to hold the line by keeping the benchmark 10-year bond yield at under 6 per cent.

Even before Friday’s auction, the RBI allowed 10-year borrowing costs for states to push higher than 7 per cent, with Punjab selling debt at 7.23 per cent and Rajasthan at 7.15 per cent last week.

However, the central bank hasn’t abandoned its control on bond yields. It boosted the size of its Operation Twist to 200 billion rupees this week — where it sells short-term debt while buying long-term ones — as Governor Shaktikanta Das deploys unconventional measures to keep borrowing costs anchored.

"Higher borrowings require higher yields," said Arvind Chari, chief investment officer at Quantum Advisors Pvt. "The crisis measures which saw interest rates go much lower than inflation will have to be unwound."

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