Mumbai: The Reserve Bank of India (RBI) has been slow in issuing new government securities to replace older ones—and bond traders were puzzled.
One clue was provided in a draft report of a working group appointed by the Indian central bank and released on Thursday. It said that one way to deepen the market for government bonds would be to increase the amount outstanding of any single security.
RBI usually issues a new bond once the outstanding amount of an existing bond with the same maturity profile reaches around Rs 60,000 crore. But with Friday’s auction, the outstanding against the paper maturing in 2024 will reach Rs85,000 crore and that against the paper maturing in 2032 will reach Rs66,687 crore, provided they are fully subscribed.
Such behaviour means that the central bank has not yet issued a new benchmark 10-year bond, which acts as a lodestone against which other bonds are also priced during trading.
A bond introduced on 8 November 2011 and maturing in 2021 is now considered the de facto 10-year paper. The outstanding against this has reached Rs 83,000 crore.
There are a few such securities where the outstanding amount is Rs 70,000 crore or more. They all are liquid, and new paper has not been issued to replace them.
Last year, the auction for a new 10-year bond was held on 8 April 2011 and again a new bond was issued on 4 November.
It is almost the end of the first half of 2012, but RBI has not yet introduced a new 10-year benchmark.
“It may be time to consider a new 10-year benchmark created through the auction process. The current benchmark followed by the market is maturing in 2021, hence it is a nine-year residual maturity gilt,” said Joydeep Sen, senior vice-president, advisory desk, fixed income, at BNP Paribas Wealth Management.
Typically, RBI introduces two 10-year papers in a year. Once the new paper comes, the old one becomes “illiquid”, or its trading stops. When a paper becomes illiquid, price discovery becomes difficult. Banks put these instruments in their so-called “held-to-maturity” portfolio that is liquidated only when a security matures.
Some bond traders believe the Indian central bank is not introducing new paper in order to make its bond-buying programme more effective.
RBI offers to buy bonds held by banks when it wants to infuse liquidity in the domestic money market through the so-called open market operations (OMOs). Its buying is usually focused on bonds that are heavily traded. In treasury-speak, the most liquid papers are called “on-the-run”, while the illiquid ones are called “off-the-run”.
“It has been seen that OMOs are not effective against off-the-run papers. Hence, to make OMOs effective, RBI is raising money against the existing paper to keep them on-the-run,” said Samiran Chakraborty, head of research, India, at Standard Chartered Bank.
RBI has so far this fiscal bought bonds worth Rs 32,080 crore to infuse liquidity into the banking system. In the last fiscal, it had bought close to Rs 1.3 trillion through its OMOs.
“The process should lead to the consolidation of the GoI’s (government of India) market borrowings to a fewer securities and fresh borrowings through a limited number of securities, thereby increasing the outstanding amount of each security, which would have a direct bearing on the secondary market trade volumes,” the draft committee report suggested.
This will help the government in managing its borrowing programme more effectively.
“Earlier people used to stop trading when the outstanding on any security used to cross some Rs 50,000-60,000 crore. The papers used to become off-the-run even as a new benchmark (had not been) announced. Now that is not the case and traders take positions on any papers knowing that it is not going off from the market any time soon,” said Nitin Jain, managing director, fixed income, at Nomura India.
This is a corrected version of the story that was posted earlier