RBI tries another way to tame bond yields

  • Yields have been rising in India on worries over inflation which rose past the RBI’s upper tolerance level of 6% in May

Subhadip Sircar, Suvashree Ghosh and Ronojoy Mazumdar (with inputs from Bloomberg)
Updated3 Jul 2021
FILE PHOTO: The Reserve Bank of India seal is pictured on a gate outside the RBI headquarters in Mumbai.
FILE PHOTO: The Reserve Bank of India seal is pictured on a gate outside the RBI headquarters in Mumbai.(REUTERS)

India’s central bank wrote to primary dealers proposing a framework for defining acceptable bids at auctions, as underwriters are having to step in to rescue more bond sales.

The Reserve Bank of India wants to define any bids that have a spread of more than two basis points from secondary market yields as outliers, according to people with knowledge of the matter, who asked not to be identified as the discussions are private.

Primary dealers are expected to act as a bridge between auctions and secondary markets, and shouldn’t bid too far from prevailing rates, the RBI said in the letter dated June 30, which has been seen by Bloomberg. It called on the underwriters to play a role that facilitates price discovery in the auctions managed by the central bank.

The proposal marks another attempt by the RBI to cap bond yields while managing the near-record borrowings by a government beset by one of the worst pandemic outbreaks globally. Primary dealers are having to rescue more auctions as traders balk at the yields offered with inflation climbing.

The central bank has asked for feedback by July 10 to its proposal, the people said. It didn’t respond immediately to a request seeking comment.

It applied its proposed framework on all proprietary bids by primary dealers at auctions from Nov. 1, 2020, to May 31, 2021. The spread between the bids placed and the prevailing secondary market yield at the close of each auction was calculated, and a spread of more than two basis points was classified as a provisional outlier, the people said.

Bids in each auction were sorted in an ascending order of yields, with the bottom 10% being marked as provisional outliers. The central bank also used Z-scores, and those with scores of more than 1.5 were also deemed as provisional outliers.

“I don’t think this kind of interference can work in the market,” said Pankaj Pathak, fund manager at Quantum Asset Management Co. “Everyone has their own self interest, and even the RBI is setting cutoffs closer to the market prices. I don’t see any robust demand in auctions.”

India has outlined a borrowing of 12.1 trillion rupees ($162 billion) for the fiscal year ending March. It said recently it will add another 1.58 trillion rupees to the program to help meet a shortfall in tax revenue by states. Underwriters have been demanding higher fees to clear bond auctions.

Yields have been rising in India on worries over inflation which rose past the RBI’s upper tolerance level of 6% in May. Shorter bonds have borne the brunt with the 5.63% 2026 bond yield rising 13 basis points last month. It was trading five basis points higher at 5.75% on Friday.

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