RBI rejects bids for 7-year G-sec due to demand for higher yield

Govt banks stay away from auction

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The Reserve Bank of India (RBI) cancelled the auction for the seven-year government bond on Friday after market participants demanded a yield of around 6.6 per cent — a level the central bank was unwilling to accept, dealers said.

 

According to market participants, accepting such high bids would have sent a negative signal and pushed yields even higher. By rejecting the bids, the RBI conveyed its discomfort with elevated yield levels, leading to a softening in yields by the end of the trading session.

 

The government had planned to sell ₹11,000 crore worth of 6.28 per cent 2032 bonds. The yield on the benchmark 10-year government bond settled at 6.53 per cent, down from the previous close of 6.57 per cent, after touching an intraday high of 6.6 per cent.

 

“The bidding was around 6.6 per cent — roughly the same level at which the 10-year benchmark was trading. Given that the seven-year is an illiquid bond, mainly held by banks, bidders sought a higher yield,” said the treasury head at a private bank.

 

“If the RBI had accepted those bids, it would have sent the wrong signal to the market and pushed yields even higher. That’s why the RBI rejected them,” the treasury head added.

 

At the time of the auction, the seven-year bond was trading at 6.46 per cent, later easing to 6.43 per cent.

 

Market participants said public-sector banks (PSBs) were completely absent from the auction. Dealers said that bidding weakened after a technical breakout at 6.56 per cent, with many PSBs already sitting on large mark-to-market losses, making them reluctant to take on additional risk. Some expect yields to breach 6.6 per cent and possibly retest 6.65 per cent, prompting state-run banks to remain on the sidelines.

 

“PSBs were completely absent from the seven-year paper. The bidding was weak after the technical breakout at 6.56 per cent. They’re already holding large loss positions, so it’s riskier for them to buy more,” said a dealer at a primary dealership.

 

Another market participant noted that banks are not adding bonds to their held-to-maturity (HTM) portfolios.

 

“After the change in investment portfolio norms came into effect on April 1, 2024, banks are reluctant to add bonds to their HTM portfolios. The seven-year bond is usually kept in the HTM book of PSBs, but with yields rising, nobody wants to take that risk,” said the treasury head at another private bank.

 

Under the RBI’s revised framework, banks must categorise their entire bond investment portfolio into three buckets —HTM, available-for-sale (AFS), and fair value through profit or loss (FVTPL). The new rules merge the earlier held-for-trading sub-category into FVTPL.

 

Banks are no longer allowed to reclassify investments between HTM, AFS, and FVTPL without board and regulatory approval. Securities under the held-for-trading sub-category within FVTPL must be fair-valued daily, while other FVTPL securities are to be valued at least quarterly, or more frequently if required.

 

Under the new norms, bonds classified as HTM must remain there permanently, except for up to 5 per cent of the portfolio that can be shifted during the year. 

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