Govt plans to switch ₹25,000 crore bonds through auction on Monday

The auction, scheduled for February 23, plans to convert a basket of government bonds maturing in 2026-27 into longer-tenor papers ranging from 2032 to 2062

The government plans to conduct a ₹25,000 crore switch auction of dated securities to smoothen its redemption profile and ease supply pressure in the bond market, the Reserve Bank of India said in a release on Tuesday.

 

Last week, a ₹75,500 crore switch was conducted. The aim of these operations is to bring down the gross borrowing number for FY27, which stands at ₹17.2 trillion as announced in the Union Budget.

 

The auction, scheduled for February 23, will convert a basket of government bonds maturing in 2026-27 into longer-tenor papers ranging from 2032 to 2062.

 

The securities proposed to be switched include the 6.97 per cent GS 2026, 5.74 per cent GS 2026, 8.15 per cent GS 2026 and 8.24 per cent GS 2027. These will be exchanged for papers such as the 8.32 per cent GS 2032, 7.5 per cent GS 2034, 7.62 per cent GS 2039, 6.57 per cent GS 2033 and the ultra-long 7.40 per cent GS 2062. 

The operation will follow a multiple-price format, under which successful bidders will receive allotment at their quoted prices.

 

However, government bond yields are unlikely to fall from current levels during the ongoing quarter. Persistent supply pressure has weighed on market sentiment, keeping traders cautious.

 

The yield on the benchmark 10-year government bond has eased by about 11 basis points from its post-Budget peak of 6.77 per cent. However, with the rate-cut cycle seen as largely over and further liquidity infusions unlikely, market participants expect the benchmark yield will not fall significantly from current levels in the quarter.

 

The yield on the benchmark 10-year government bond settled at 6.66 per cent, compared with the previous close of 6.68 per cent.

 

“In terms of net borrowing, nothing materially changes. The demand-supply dynamics remain the same as before. While sentiment is marginally positive, it does not alter the overall market outlook. Yields are likely to remain elevated. In the near term, the 10-year benchmark is seen in the 6.60-6.75 per cent range, and technically it looks highly unlikely to sustain below 6.65 per cent,” said a dealer at a private bank.

 

Net market borrowing, after accounting for scheduled repayments, is estimated at around ₹11.7 trillion for the upcoming financial year.

 

The next policy action is more likely to be a rate increase, should inflation rise, depending on prevailing conditions.

 

“It is unlikely that yields will fall further, as the rate-cut cycle is now over and additional liquidity support is not expected. The net borrowing amount remains the same,” said a dealer at a primary dealership.

 

“At this stage, the only relief could come from buyback auctions. That said, the effectiveness will depend on the size, timing and the specific securities chosen. Until there is clarity on that, the impact is likely to remain limited,” the person added.