RBI spurns high-yield bond bids

Primary dealers buy and sell government bonds. They also underwrite the bonds in auctions. Two bonds of 25 years and 13 years maturity partially devolved on them as RBI rejected some bids made at a higher yield than what the central bank expected.

“We can interpret this (the devolvement) as a small interest rate signal and this, to some extent, will address the uncertainties in the market," said Pradeep Madhav, managing director of STCI Primary Dealer Ltd.

According to N.S.?Venkatesh, managing director of IDBI Gilts Ltd, another primary dealer, RBI has clearly signalled at what level it wants to keep the yields. “This will take care of the speculation in the market done by a few players who try to push the yields higher without much apparent reason."

However, PDs will not be able to bear the burden of continuous devolvements if RBI decides to reject higher bids in upcoming auctions. There are some 18 PDs, but none of them seems to have much appetite even as the market is flooded with new government papers.

“If RBI forces us to take more devolvements, we will have to sell bonds in the market and that will put pressure on yields. So, the purpose of keeping the yield low will be defeated," said a bond dealer with another PD under condition of anonymity.

RBI on Tuesday auctioned Rs12,000 crore of government bonds, the first instalment of a Rs46,000 crore additional borrowing by the government in fiscal 2009. RBI auctioned three bonds of different maturities—Rs7,000 crore in eight-year bonds, Rs3,000 crore in 13-year bonds and Rs2,000 crore in 25-year bonds.

The cut-off yields were largely along expected lines—6.98% for the eight-year bond; 7.50% for the 13-year bond; and 7.75% for the 25-year bond. Primary dealers had to buy Rs559.89 crore of the 13-year bond and Rs935.1 crore of the 25-year bond as bids for them were higher than the RBI’s comfort level.

The government plans to borrow Rs2.60 trillion from the market in 2009 against its estimate of Rs1.45 trillion. This is to bridge the widening fiscal deficit—estimated at 5.5% of gross domestic product against an initial target of 2.5%.

Yields on the most-traded nine-year paper rose to a two-month high of 6.68% on Tuesday after stand-in finance minister Pranab Mukherjee said the government would cut excise duty from 10% to 8% and service tax from 12% to 10%.

The cuts, which will cost the exchequer Rs28,100 crore, sparked fears of more government borrowing. However, yields dropped 8 basis points after the auction results, as the devolvement was interpreted as a sign that RBI would try to keep the longer tenure interest rate at the devolvement level. A basis point is one-hundredth of a percentage point.

RBI had earlier this month said it would conduct open market operations, or OMOs, to ensure the government’s additional borrowing in a “non-disruptive" manner. RBI conducted its first OMO on 19 February, buying Rs5,000 crore of bonds from the market against a plan of Rs6,000 crore.

Bond dealers are not reading much into Tuesday’s devolvement and, according to them, yields will rise if RBI does not cut rates and buy back more bonds from the market.

In Tokyo last week, RBI governor D. Subbarao had hinted that there was still room for more rate cuts. Subbarao on Sunday assured Mukherjee that RBI is monitoring the economic developments caused by the global downturn and will take measures as and when needed.

RBI left its policy rates unchanged in its January policy review after cutting the repo rate, or the rate at which it infuses money into the market, by 350 basis points to 5.5% since October. It has also cut the reverse repo rate, or the rate at which it sucks out liquidity from the system, by 200 basis points from 6% to 4%.

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