Mumbai: The Reserve Bank of India on Friday forced underwriters to buy more than a third of its new 10-year benchmark bond as the markets demanded higher yields than what the central bank was offering.
Of the ₹13,000 crore on offer on the new bond, the central bank made the primary dealers or underwriters buy ₹5,442 crore.
The cut-off yield on the new 10 year came at around 6.54% in the auction. The paper closed at a discount of 6.56% while that on the current 2031 jumped two basis points to 6.58%. Dealers said underwriting commission of ₹13.80 was also too high for a new 10-year benchmark.
The devolvement of G-Sec 2032 is a signal to the government to keep its borrowing programme under check in the Union budget that is slated to be announced next month.
“The devolvement of the new 10-year bond is seen as the Reserve Bank’s discomfort with the current yield level; the central bank could have been expecting a lower cut-off yield. With the budget around the corner and market expectations of a bigger borrowing programme from the government, it will lead to a further increase in the yields. The government has to find ways to cap its borrowing programme to at least ₹12 trillion for yields to remain under check. Devolvement is no way going to help in improving the market sentiment,” said Naveen Singh, head of trading, ICICI Securities Primary Dealership Ltd.
The yield on the 10-year bond has been trending higher ever since the US Federal Reserve signalled a hawkish stance in December and the Reserve Bank stepped up variable reverse repo rate (VRRR) auctions to suck out surplus liquidity from the banking system.
The devolvement of the auction will have an impact on other government securities (G-secs), including state government bonds.
Therefore, the market is expecting RBI to intervene in the market by buying bonds through open market operations.
“RBI has stopped buying bonds from the market after the G-Sec Acquisition Program (G-SAP) was withdrawn in September. The market is now expecting RBI to buy at least ₹50,000-60,000 crore of bonds through OMO or G-SAP to stabilize the yield, which has moved up nearly 30-40 basis points since then,” said Gopal Tripathi, head of treasury, Jana Small Finance Bank.
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