Mumbai: The Reserve Bank of India (RBI) on Friday introduced a new 10-year bond with a yield of 6.9%.
This is 85 basis points (bps) higher than the yield on the previous 10-year bond floated in February. Hundred basis points equal 1 percentage point.
Fresh efforts: The RBI building in New Delhi. The yield on the new bond is 85 bps more than that on the 10-year paper floated in February. Harikrishna Katragadda / Mint
The yield on the latest paper makes it clear that interest rates in the bond market are hardening even though banks are bringing down their lending rates.
Bond yields are on the rise following the oversupply of government papers in the market. The government will borrow Rs4.51 trillion in 2009-10 from the market instead of its earlier plan of Rs3.51 trillion to bridge its fiscal deficit. The estimated fiscal deficit for the year to March has gone up from 5.5% to 6.8%.
High government borrowing crowds out private investment demand and makes borrowing funds from the market costlier for the corporations.
In Friday’s Rs15,000 crore bond auction, RBI managed to raise Rs6,000 crore through the new 10-year bond, Rs5,000 crore through a six-year paper, and Rs2,000 crore through a 15-year paper. The primary dealers, the underwriter of government bonds auctions, had to buy Rs312 crore of a 25-year bond from a scheduled auction of Rs2,000 crore.
The success of the auction signifies that the bond market’s confidence in RBI’s ability to stabilise the market despite the rise in the government’s borrowing programme.
“Compared to yesterday’s OMO (open market operations), today’s auction was not a bad performance,” said J. Moses Harding, global markets group, IndusInd Bank Ltd.
RBI buys bonds from the open market to infuse liquidity in the system. On Thursday, it had bought only Rs1,661 crore against a planned Rs7,500 crore. This had disappointed market participants.
“There is still appetite for bonds in the market,” said an executive director of a public sector bank who looks after treasury operations.
“The yields are high now and lot of people are willing to take positions in the primary market and buy bonds in bulk instead of hitting the secondary market,” he said on condition of anonymity.
“RBI should keep the yield of the 10-year between 6.75%-7% through their actions, if they want a stable bond market,” Harding said.
After the auction, the yield on the new 10-year paper closed at 6.87% in secondary market trade.
Meanwhile, RBI said the ceiling of intervention bonds this year will be Rs50,000 crore, much lower than the ceilings of the past few years.
The central bank started issuing such bonds in 2004 under a market stabilization scheme (MSS) to suck out excess liquidity caused by its continuous dollar buying. It was buying dollars to check the runaway rise of the local currency, as a stronger rupee hurts exporters as their dollar income comes down in rupee terms. The ceiling of MSS bonds in fiscal 2008 was Rs2.5 trillion.
The present ceiling will be revised when the outstanding amount of the bonds will be at Rs35,000 crore, the central bank said in a statement.
Dealers don’t expect RBI to issue too many MSS bonds this fiscal as the liquidity in the system is not creating inflationary pressure as of now.
“The lower ceiling (of intervention bonds) means that RBI does not want to suck out liquidity from the market but it probably wants the banks to increase their credit exposure or invest in government bonds during auctions,” said Harihar Krishnamurthy, head of treasury at the Indian arm of First Rand Bank.