G-sec yields rise as rupee weakens against dollar

Uniform price auction switch by RBI inadequate, with further fall expected in the currency and rate cut hopes diminishing

The Reserve Bank of India’s (RBI) conduct of government bond auctions with the uniform price auction instead of the multiple price auction method has not been successful in arresting the rise in yields. This is because of the weakening of the rupee against the dollar.

The rupee weakened to a record all-time low of 61.21 to a dollar on Monday. Due to this, the yield on the 10-year benchmark 7.16 per cent 2023 bond touched 7.63 per cent during intra-day trade. It ended at 60.62, compared with the previous close of 60.24. The yield on the 10-year benchmark ended at 7.57 per cent, compared with the previous close of 7.50 per cent.

Under the uniform price auction method, all successful bidders are required to pay for the allotted quantity of government securities at the same rate, the auction cut-off rate. This is irrespective of the rate they quote. Under multiple price auction, successful bidders are required to pay for the allotted quantity of government securities at the respective rates they’d bid.

RBI started following the uniform price auction method from the auction on June 21. “RBI’s aim was to arrest the rise in bond yields by adopting this method. But, as the rupee has been weakening, following this did not help much,” said a government bond dealer with a mid-size public sector bank. He accepts, though, that in a scenario where RBI is auctioning bonds every week, if the uniform price auction method was not followed, the yields would have risen even further. As most economists are expecting no change on key policy rates in the first-quarter review of monetary policy later this month, the rise in bond yields will continue.

The repo rate is 7.25 per cent; since the current financial year began on April 1, it was cut once, by 25 basis points in May.

The Street expects the rupee to weaken further. “It might touch 65 a dollar some time in 2013 and if that happens, the yield on the 10-year benchmark will be at 7.80 per cent,” said Rajesh Verma, vice-president (treasury), Development Credit Bank.

RBI can buy the bonds in open market operations to help the market. But, with liquidity comfortable, government bond dealers do not expect this in the near term. The Street feels the central bank cannot do much to support the rupee, either, as the weakening is due to global factors and RBI’s own forex reserves are depleting.