RBI declines to accept all bids at debt auction

Out of the announced sale of Rs 15,000 crores, RBI 'devolved' Rs 1942 crores

The Reserve Bank of India (RBI) did not accept all bids at its scheduled bond auction on Friday, the first time in six months a debt sale has raised less than the announced amount, as the central bank sought to signal its discomfort about high yields.

Out of the announced sale of Rs 15,000 crores ($2.25 billion) on Friday, the RBI "devolved" Rs 1942 crores of the 7.59% 2029 bond, while accepting all bids for the remaining three bond maturities being sold.

The RBI can choose not to accept all bids at the debt auctions through a process known as a "devolvement", which leads underwriting dealers to buy up the shortfall in undersubscribed tenders at the determined cut-off yield.

The devolvement comes at a time when the RBI is engaging in a tricky balancing act with domestic yields to keep volatility out of its bond markets ahead of the Federal Reserve's historic policy decision this month.

The RBI's last devolvement was on June 12 when sentiment was negative due to a high inflation reading.

"The bids had come at much higher yields," said one official aware of the central bank's decision in explaining the devolvement.

Still, the official added the central bank had also decided not to devolve too big an amount in order to avoid destabilising markets.

In previous auctions, the RBI agreed to pay higher interest rates to investors at bond auctions, fearing a devolvement would send a negative signal to markets, people with knowledge of the central bank's operations had told Reuters.

But this week, the RBI announced it would buy bonds in the open market, as traders noted the central bank appeared to worry that yields had now risen too much.

A second official familiar with the RBI's thinking said the devolvement on Friday was another signal the central bank believed yields had risen too much.

"Market cannot take RBI for a ride," said another senior official. "It is important to give a signal that RBI is a responsible debt manager."

($1 = 66.78 rupees)