Maiden 50-year bond becomes an instant hit with insurance companies

Bids worth Rs 40.2K cr vs target to raise Rs 10K cr

The inaugural auction of India’s 50-year bond on Friday saw robust demand, signalling a growing interest in ultra-long-term securities among insurance companies and pension funds. The Reserve Bank of India (RBI) set the cut-off yield on the bond at 7.46 per cent, exceeding market expectations.

The RBI received 216 bids worth Rs 40,200 crore against the notified amount to raise Rs 10,000 crore via the 50-year paper. As part of its borrowing calendar for the October-March period, the central government plans is looking to garner Rs 30,000 crore via the 50-year bond.

Before the introduction of the 50-year bond, the longest available government bond was the 40-year paper, which settled at a yield of 7.45 per cent on Friday.

 

The central government introduced the 50-year tenor security in its borrowing calendar for the second half of the current financial year, fulfilling a long-standing demand by life insurance companies, particularly the Life Insurance Corporation of India.

“Most of the demand came from insurance and pension funds,” said Naveen Singh, vice-president of ICICI Securities Primary Dealership. “The demand for the bond should persist as the market has given some premium to the issue.”

The central government plans to borrow Rs 6.6 trillion in the second half of the current financial year. The planned borrowing in H2 constitutes 42 per cent of a total Rs 15.43 trillion planned for the current financial year.

Churchil Bhatt, executive vice-president, Kotak Life Insurance, said: “While the market always believed that the demand for the 50-year bond will be good, the result of the debut auction has unequivocally affirmed the same. We can’t say for sure but it is safe to assume that the bulk of the demand was from large insurance companies and pension funds.”

Market participants reported that public sector banks stocked up on 10-year papers, while the majority of demand for the 5-year paper came from private sector banks and mutual funds.

Meanwhile, the central bank discussed the prevailing liquidity condition in the banking system during its two-day informal meeting with treasury heads of financial institutions, market participants said. The RBI had scheduled meetings on Thursday and Friday to gather feedback on ongoing market developments.

“They discussed the liquidity condition of banks. They (RBI officials) did not reveal anything about the open market operation (OMO) auction; they were just collecting information” said a dealer with a state-owned bank.

The liquidity in the banking system remains in deficit. On Thursday, the RBI injected Rs 16,591 crore into the banking system.

The treasury head at a private bank said: “This was a routine talk with the RBI. They (RBI) call treasury heads of banks every year once or twice for feedback. They did not discuss anything around the OMO.”

Market participants had expected that the RBI might announce an OMO auction in the first week of November. “We were expecting the OMO auction in the first week itself, but the liquidity is still in deficit,” said a dealer at a primary dealership.

Reserve Bank of India Governor Shaktikanta Das had stated in his latest monetary policy statement that the central bank may conduct open market operations to mop up liquidity. The central bank had not given any timeline for OMO sales and said they would depend on the ongoing liquidity situation.

The liquidity has largely remained in deficit since September 15. The deficit liquidity neared Rs 1.47 trillion on September 19, the highest since January 29, 2020, when the banking system liquidity deficit went up to Rs 3 trillion.