The central bank has advised states to defer their debt issuance to periods when yields are softer.
The bond market now expects the RBI to announce an open market operation (OMO) calendar for bond purchases during the January-March period. This would be in the next policy review on December 5 even as rate cut hopes have faded with Q2 GDP growth numbers expected to be strong. The OMOs will also aid state borrowing.
The announcement of an OMO calendar will have a sobering effect on bond yields. The Q2 growth numbers will be released by the end of the month.
“The market is cautious right now; we saw what happened with the seven-year paper. That is precisely why the RBI has advised states to reschedule some of their borrowings and avoid issuing when yields are elevated,” said a senior official from a large public sector bank (PSB).
On October 31, the RBI cancelled the sale of a seven-year central government bond after investors sought yields higher than those on the new 10-year bond. This, the central bank found unacceptable.
States have already been borrowing cautiously. At the latest weekly state development loans (SDLs) auction, seven states raised ₹11,600 crore, lower than the notified amount of ₹13,600 crore.
Maharashtra rejected all bids for the re-issue of its 2050 and 2055 bonds, each worth ₹1,000 crore.
The total amount raised was also well below the ₹19,450 crore indicated in the borrowing calendar.
For the third quarter, states and Union Territories (UTs) plan to borrow up to ₹2.81 trillion through SDLs. So far in the current quarter, they have raised around 64 per cent of the amount indicated in the borrowing calendar.
The weighted average maturity of SDLs has also shortened to about 13 years, compared with nearly 20 years in the first half of the financial year. It indicates that states are preferring shorter-tenure bonds to reduce borrowing costs.
Some market participants expect states to borrow more in the last quarter of the year, when the RBI is likely to announce its OMO purchase calendar.
There are also typically higher cash-in-circulation (CIC) leakages in Q4, which could tighten liquidity. This would prompt the central bank to conduct OMOs.
The bond market, which has ruled out a rate cut in the December policy meeting amid strong growth, now anticipates that the RBI may announce OMOs worth ₹1–1.5 trillion in the last quarter of the current financial year.
“OMO purchases are expected in December as there is a demand from the market,” said the treasury head at a state-owned bank.
He added, “Until the December policy, the yield (on the benchmark 10-year government bond) is expected to trade near the current level.”
The yield on the benchmark 10-year government bond settled at 6.51 per cent on Friday.
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