The Reserve Bank of India (RBI) on Friday once again cancelled its scheduled auction of dated securities, signalling its discomfort with yields.
The cancellation of Rs 110 billion worth of bonds was a good enough reason for the 10-year bond yields to cool down by a steep 17 basis points from its day's highs. The yields topped 7.67 per cent at noon and then corrected to 7.50 per cent by the afternoon after rumours of potential secondary market bond purchases by the RBI, but the yields rose again to close at 7.56 per cent.
This is the third time since December 29 that the central bank has cancelled, either fully or partly, an auction. While each time it didn't give a reason, it is clear that a sudden spike in yields was the reason for not accepting any bids that bidders would have placed with the central bank.
With the three auctions cancelled, the total stock not sold yet amounts to Rs 260 billion (Rs 110 billion on December 29, Rs 40 billion on January 19 and Rs 110 billion on February 2).
Interestingly, this is the first such cancellation after the revised extra borrowing plan was reduced from Rs 500 billion to Rs 200 billion. Generally, the RBI does come back in the market at the end of financial year to sell the unsold stock, but bond dealers say if yields remain what they are now, or continue to rise, the central bank will find it difficult to get buyers at the price it wants to sell the bonds.
rbi bond graph
“Essentially, the revised extra borrowing number will stand at Rs 90 billion if the cancelled auction is not reintroduced. That is not worth all the volatility that happened around the extra borrowing plan,” said a senior bond dealer with a primary dealer.
The mood in the bond market was already bad for quite some time, but Thursday's Budget numbers and fiscal slippage made matters worse. The government said the fiscal deficit would be now at 3.5 per cent of the gross domestic product (GDP), instead of the 3.2 per cent budgeted earlier. The net borrowing number comes at 4.62 trillion for the next fiscal year.
Banks, the primary investor in government bonds, are largely sitting outside the market as yields rise and losses mount on their books. When yields rise, prices of bonds fall.
Rising crude oil prices, and a possibility of rates hardening in the next fiscal year due to a hawkish central bank stance would be detrimental to bond yields.
And banks have to book mark-to-market losses on their trading portfolio if prices drop below their historical price at which they were purchased. Banks in the December quarter may have booked at least Rs 150 billion in mark-to-market losses. Clearly, they have no more appetite now.