RBI could be facing another standoff with traders over new bond sale

Central bank seeks to keep the government's borrowing costs low, while investors are demanding higher yields.

The Reserve Bank of India is set for another standoff with traders as it auctions a new benchmark 10-year bond.
 

While the current benchmark coupon was set at 5.85%, five traders surveyed by Bloomberg expects the central bank to sell the new bond at a cutoff yield of 6.1% at Friday’s auction.

The RBI has been locked in a tussle with the bond market as it seeks to keep the government’s borrowing costs low, while investors are demanding higher yields because of rising inflation and supply concerns. Setting a lower coupon for the new 10-year bond may lead to a rescue by underwriters, while a higher rate risks signaling rising yields across the curve.

“Given the RBI’s focus on keeping yields around 6% and market already pricing-in higher cutoff yields for the new paper, it’s a possibility that the RBI is poised for another round of tussle,” said Madhavi Arora, lead economist at Emkay Global Financial Services.“The RBI will have less sway over the 10-year yields initially.”

RBI's purchases have kept 10-year yields in check compared to other yields

The cutoff yield for the benchmark 10-year bond is closely watched by the market as it acts as a reference point for the entire gamut of borrowing costs. The new 10-year bond last traded at 6.06% in the when-issued market on Thursday, where price discovery happens.

The current 10-year note closed at 6.13% Thursday. Governor Shaktikanta Das said the RBI is committed to ensuring the lowest possible costs for the government’s borrowings, according to a Business Standard newspaper report published Thursday. Das also denied that the RBI is focusing only on the 10-year note.

Meanwhile, bond yields have started rising over the past few weeks as inflation held above the RBI’s 2%-6% comfort zone and accelerating global oil prices stoked fears that the central bank will signal policy normalization in August.

The RBI will sell 260 billion rupees ($3.5 billion) of bonds Friday, including 140 billion rupees of a new 10-year bond.

”The new benchmark comes with a limited amount of liquidity, and won’t be in the hands of RBI from day one,” said V. Lakshmanan, treasurer at Federal Bank Ltd. “Having said that it would not long for the RBI to again have this control,” as it continues to also buy bonds in the secondary market, he said.