Record Purchases by ‘Others’ Fuels Speculation of RBI Hand

(Bloomberg) -- A record purchase of government debt by a category called ‘Others’ has further cemented speculation that the nation’s central bank was behind ensuring the success of Thursday’s auction.

The ‘others’ category, which typically includes the monetary authority, insurance and pension funds, bought 250 billion rupees ($3.4 billion) of bonds, its biggest purchase, according to Clearing Corp. of India data going back to 2006. Interestingly, state-run banks and primary dealers, from whom the Reserve Bank of India would have typically bought the bonds, were cumulative sellers of 259 billion rupees.

Earlier, surprise demand at a special auction for Indian government bonds had spurred speculation that the nation’s central bank was buying in the secondary market.

The benchmark 10-year bond was sold at 5.9726% cutoff yield, lower than 6.03% estimated in a survey by Bloomberg News. The 2025 bond saw a cutoff yield of 5.5410%, lower than the estimated 5.60%. The central bank accepted 20 billion rupees ($275 million) more in each bond than the total 220 billion rupees it had planned to raise.

The RBI has been active in the market to ensure that the benchmark yield is anchored below 6%. On Wednesday, the central bank bought bulk of the bonds in the 10-year segment at a higher than expected price in an open market purchase auction signaling its intention.

Read: India Inflation Staying Above 6% Seen as Risk to Rates Path

“It appears that the the RBI bought bonds in the secondary market to keep yields anchored,” said Debendra Dash, head of fixed income at AU Small Finance in Mumbai. Once the central bank started buying, traders who had gone short may have also jumped in to cover their positions, and that boosted demand for bonds, he said.

Yields fell further in secondary market trades on Thursday after the sale with large trades reported in the benchmark paper. The 10-year note dropped five basis points to 5.96%. Investors got an indication of the RBI’s intention earlier in the day when the underwriting commissions, which primary dealers get for underwriting bonds, came in much lower than market estimates.

Over 262 billion rupees of transactions were reported under the voice-based section for local trades, according to the Clearing Corp. data, which traders say was unusually high and pointed to RBI intervention. These trades suggest that the bonds auctioned on Thursday were immediately sold in the secondary market.

Read: India Said to Plan More Than $41 Billion in Bond Purchases

The central bank accepted 15 bids for the 2025 bond and 18 bids for the 2030 bond, it said. The bonds were part of last Friday’s auction, where bids were rejected as traders demanded higher yields. The central bank is due to sell another 260 billion rupees of bonds at a pre-scheduled auction this Friday.

“The market reaction indicates the the central bank may protect 6% to 6.10% through a combination of primary and secondary market intervention,” said Ritesh Bhusari, deputy general manager for treasury at South Indian Bank. “Otherwise, there is a lack of genuine commercial demand.”

The RBI may buy 3 trillion rupees of bonds in the current financial year and in excess of that in the following 12 months to help smooth the passage of the borrowing program, Bloomberg News reported Monday, citing a person familiar with the matter.

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