RBI holds back selling 10-yr bond indicating advent of new benchmark paper

The Reserve Bank of India (RBI) did not sell any of its planned Rs 14,000 crore worth of the benchmark 10-year bond in Friday’s auction as market appetite for the paper is on the wane and bidders may have asked for higher yields.

This may also indicate RBI’s discomfort in breaching the limit outstanding in the bond, and that a new 10-year bond could be coming any time soon, may be in the next auction itself, say bond dealers.

The government has raised more than Rs 1.19 trillion against the existing bond, a limit after which a new paper is issued to ease the redemption pressure. The RBI, however, had paid underwriting fees for the existing 10-year paper, indicating its willingness to sell the bond.

Therefore, there is no certainty about the fate of the benchmark 10-year paper. It is now the sixth most traded paper in the market, which is a departure from the norm, where the 10-year paper was always the most traded and most liquid.

This is because the central bank now holds most of the outstanding stock in its book with a possible aim to keep the yields anchored at around 6 per cent. RBI picked up the available stock actively in various secondary market operations, and may be even anonymously from the market, say bond dealers. As a result, the available security for free trading in the market is limited, considering the RBI actively intervenes in the segment.

However, yields in other bonds have risen as RBI let them be largely. The 5-year bond has increased nearly 20 bps in the past 15 days, and longer-term yields have seen similar increase. In fact, the blended 10-year yield, which is a hypothetical number derived by the market plotting pricing on different maturities, may have increased by 17-20 bps for the 10-year bond as well. The closing yield of the 10-year bond, though, was 6.02 per cent, just about the same it was during this period.

“The market may have wanted more than 6 per cent yield, which the RBI was not prepared to give,” said Debendra Dash, senior vice-president at AU SFB.

The market may not also be prepared to take positions in an illiquid bond when a new 10-year could be around the corner. The aggregate bid against the bond was Rs 18,782 crore, against the offered Rs 14,000 crore. Generally, the bid ratio on the 10-year bond is on the higher side in primary auctions.

“The RBI will introduce a new 10-year for sure in due time. Now, it remains to be seen if they have the appetite to breach the conventional limit of a stock, which is so far Rs 1.2 trillion. Whatever the RBI makes of the stock becomes the new limit for other bonds, which may cause trouble for the government honouring lumped up redemption later,” said a senior banker, who did not want to be named.

In Friday’s auction, RBI sold a little more than Rs 12,000 crore, less than half of the Rs 26,000 crore planned through three bonds. Even here, the bond maturing in 2023, against which Rs 3,000 crore was planned, the primary dealers were forced to buy almost the entire stock, indicating the central bank’s displeasure towards market demand. It, however, sold the entire Rs 9,000 crore and borrowed Rs 48 crore extra against a bond maturing in 2061, RBI’s cut-off statement showed.