RBI signals discomfort with sharp yield uptick; issues new seven-year paper

The Reserve Bank of India (RBI) on Wednesday issued a new seven-year paper with yields at 7.1 per cent, even as there was partial devolvement on the 10-year benchmark in auction, indicating discomfort with sharp rise in yields.   

Treasury executives and bond dealers said the fixation of price for the Government of India bond maturing in 2029 was on expected lines. Usually, the trend is of the RBI coming up with a long-term paper, but it has issued bonds whose maturity falls between five years and 10 years, perhaps to ease some pressure on the benchmark.  

The RBI statement showed for a seven-year paper, the notified amount was Rs 7,000 crore and bids received were worth Rs 22,632 crore.

As for the 10-year benchmark (6.54 per cent — 2032), the notified amount was Rs 13,000 crore. Investors placed bids worth Rs 31,633 crore and the RBI accepted bids for Rs 11,433 crore with a cut-off yield at 7.24 per cent. The devolvement on primary dealers was of Rs 1,553 crore.  

This week, the government had notified to raise Rs 30,000 crore through market borrowings. The Union Budget (2022-23, or FY23) had placed gross market borrowings at Rs 14.95 trillion, which was 44.2 per cent above the preceding year.

In the first half (H1F23), gross market borrowings of the central government through dated securities have been planned at Rs 8.45 trillion — 59 per cent of the estimated gross borrowing for the year.

The yields on the 10-year benchmark cooled off slightly after partial devolvement in the bond auction. Through partial devolvement, the central bank has signalled its discomfort with excess rise in yield.

The yields on the 10-year paper were 7.21 per cent at the close of trading. They were at 7.25 per cent in opening trade and touched a high of 7.27 per cent through trading hours, revealed the Clearing Corporation of India data.

The RBI’s cues on comfort level are expected to bring some stability to yields. These will assist the government’s borrowing programme in the next few weeks, they said.

The yields on the benchmark 10-year government bonds have risen 37 basis points in the current fiscal year so far, from 6.84 per cent at the end of March 2022.

The rising yields also have an impact on the primary issuances in the corporate bond market. The wait-and-watch mode is driving sentiment in the market. 

Ajay Manglunia, managing director and head-institutional fixed income, JM Financial, said the start of the new fiscal year has seen a sharp rise in inflation, pushing yields up. With these yield levels, issuers (corporates) are very cautious about visiting markets to raise funds. Investors would also like to see the market stabilise before they commit to funds.