Mumbai: The Reserve Bank of India (RBI) on Thursday bought bonds worth Rs1,661 crore from the secondary market, sharply lower than a scheduled Rs7,500 crore purchase.
Enough liquidity? The Reserve Bank of India building in New Delhi. Its bond purchase on Thursday was much lower than the scheduled Rs7,500 crore buying which, traders say, has sent out confusing signals. Harikrishna Katragadda / Mint
The yield on the most traded five-year bond rose to 6.3958% after the buy-back, from its previous level of 6.33%. It closed almost flat at 6.37%. The central bank bought back Rs926 crore of the existing 10-year paper at 6.9174% and Rs735 crore of the 23-year security at 7.7967%. It rejected all bids for the 14-year paper.
RBI will auction Rs15,000 crore of fresh securities on Friday. The fresh auction will also include a new benchmark 10-year paper.
Its original schedule was to auction Rs8,000 crore worth of bonds, which was increased after the government announced in its Budget for 2009-10 that it would need to borrow an extra Rs89,000 crore from the market to bridge a fiscal deficit of 6.8%. The total borrowing this year is expected to be Rs4.51 trillion.
“We were expecting RBI to buy more from the market. Tomorrow you are auctioning Rs15,000 crore and to support that you are buying back Rs1,661 crore odd...it’s just not enough,” said a bond dealer with a primary dealership, a firm that trades in government bonds. The dealer declined to be named.
“I am not sure what signals RBI is giving,” said another dealer working at a foreign bank who also requested anonymity. “Probably it’s their way of saying that there is enough liquidity in the system and they really don’t need to conduct OMOs (open-market operations) to provide liquidity. But they should communicate that to the market.”
Banks parked about Rs1.47 trillion of their surplus fund with RBI on Thursday.
Bond dealers said the lower- than-expected buy-back means that RBI will be tough on Friday’s auction and reject aggressive bids, where dealers will ask for higher yields than what RBI wants to offer. Primary dealers will then have to buy a significant amount of papers that could remain unsold.
Primary dealers are the underwriters of the auction and they are required to buy the unsold bonds in a process known as devolvement. These dealers will also have to buy the papers at rates that RBI sets.
However, not all dealers were uncomfortable with Thursday’s results.
“(The) market was sceptical about RBI not accepting more bids, but the yields at which RBI accepted the bids were at market rates and were pretty good,” said S.S. Raghavan, head of treasury at IDBI Gilts Ltd. According to him, liquidity is not a problem now and that the market’s reaction was “unnecessary”.
The yields on the 10-year paper that is to be introduced on Friday was trading in the range of 6.80-6.86% on the so-called when-issued platform, which according to bond dealers, is a bullish sign in the present situation.
A when-issued market allows transactions in government bonds that have been announced already, but not have been issued yet.
Reuters contributed to this story.