RBI devolves 10-yr bond auction for fourth time, underwriters step in

Bond dealers say the central bank has singled out the 10-year bonds as marquee rate setting bonds and is trying to put out a forceful rate signal

The Reserve Bank of India (RBI) refused to sell 10-year bonds at Friday’s primary auction for the fourth time in a row, a day after it scrapped a bond purchase programme from the secondary market, even as it received more than six times the bid for its Rs 10,000-crore open market operation (OMO).

The central bank did not want to sell the 10-year bonds at the market ask on Friday, like the previous three times, even as it is letting the other bonds being sold to investors. The securities had to be bought by the underwriters of the bonds, mainly primary dealers.

With Friday's auction, the borrowing programme for the first half of the financial year 2020-21 (April-September 2021, or H2FY21) comes to an end. Calendar for the second half is expected soon. 

Rate signal

Bond dealers say the central bank has singled out the 10-year security as a marquee rate-setting bond and is trying to put out a forceful rate signal.

“Somehow, it is also a signal to banks that they must earn their profits through lending operations and not just from the treasury as the second quarter comes to an end,” said a senior bond trader who did not want to be named.

The RBI had planned a Rs 30,000-crore bond sale on Friday through different tenor bonds.

Of the Rs 18,000 crore of 10-year sale planned, the RBI rejected bids for Rs 17,863.90 crore. The remaining Rs 12,000-crore auctions through other bonds were conducted smoothly.

The 10-year bond sales are being held every fortnight. On September 11, the RBI had similarly rejected almost the entire batch of the 10-year bonds. Before that, on August 14 and on August 28, the RBI had refused to oblige the market ask.

What is surprising the market, though, is that the RBI is not even ready to give the existing yields in the market. The cut-off for the 10-year bond was set at 6.0095 per cent. But the 10-year bond yield closed at 6.0384 per cent. This shows that the RBI is not happy with even the market yields and is telling the bond market loud and clear that the yields need to come down, say dealers. Being the money manager of the government, the RBI wants to borrow at 6 per cent and not more, they say.

High spread

While the RBI is compelled to keep the yields down, the central bank’s penchant to see the 10-year bond yields low, even when the market is getting fatigued due to oversupply, is understandable. The policy rate transmission in 10-year bond segment has not happened as much as those in the three-year and below segments.

According to Gaurav Kapur, chief economist of IndusInd Bank, the spread between the 10-year bonds and reverse repo rate has remained too high, and despite the oversupply concerns, it is valid for the RBI to want to see some fall in yields, especially after so much of liquidity measures.

The RBI’s decision to cancel Thursday’s outright open market operations (OMO) purchases also indicates the RBI’s displeasure that the banks could be playing an arbitrage game with their easy liquidity without trying to lend out their money.

The banks are clearly on a risk-aversion mode, and this could hurt them in the long run, RBI Governor Shaktikanta Das had warned at the Business Standard banking conclave last month.

The RBI’s refusal to budge on yields is going to force banks to go back to their core banking operations to earn profits, experts say. But that doesn’t mean that the central bank is not ready to listen to genuine market demands.

“The RBI’s signal is very clear — it will support the market but not necessarily at any cost the markets impose on it,” said Soumyajit Niyogi, associate director at India Ratings and Research.