RBI likely to go against convention on raising funds through bonds

The Reserve Bank of India (RBI) will use the existing 10-year bond to raise at least Rs 14,000 crore from the markets on Friday, taking the outstanding of the paper to more than Rs 1.33 trillion, possibly the highest ever amount raised against a security.

This gives credence to the theory that the central bank may not want to issue a fresh set of 10-year paper in a hurry and would rather continue with the existing security.

Generally, a fresh set of bonds is announced after about Rs 1.2 trillion is raised against a security, but this is possibly the only case where that limit has been breached.

Even as the outstanding against the existing 10-year paper has crossed Rs 1.19 trillion, going by past practices, most of the 10-year paper stock is now with the central bank. The central bank is targeting the 10-year segment to keep yields at around 6 per cent.

Since there is no liquidity of this paper in the market, the trading volume has crashed. On Monday, it was the sixth-most traded security in the market, trading only Rs 375 crore, something not heard of for the 10-year benchmark, which is always traded the most.  

Last fiscal year, the RBI had changed the 10-year security papers thrice because the outstanding stock on each crossed Rs 1 trillion.  

There is also no indication that the RBI will stop at that.

The plan to use the paper, as part of a Rs 26,000-crore bond auction, came in an announcement on the RBI website. The government plans to exercise a green shoe option of Rs 6,000 crore in the auction.

In the coming days, therefore, more funds can be raised against this paper.