Bond sale devolves as RBI refuses to yield

The Reserve Bank of India (RBI), which is fighting to cool bond yields, declined to pay the high returns demanded by investors in Friday’s auction, resulting in buyers staying away from the ₹18,000 crore bond sale. For the second time in two weeks, primary dealers who underwrite bond auctions, stepped in to buy then.

In a press release, the central bank said primary dealers bought bonds worth ₹17,980 crore, while only ₹16.2 crore worth of bonds were sold to others.

The government had planned to sell the bonds maturing in 2030 bearing a coupon of 5.77% at a cut-off yield of 6.1448%, compared to Bloomberg’s estimate of 6.22%.

The outcome of Friday’s auction is a repeat of 14 August, when ₹4,650 crore of 10-year bonds remained unsold, despite banks sitting on excess liquidity.

“RBI had decided to devolve the auction as they are not comfortable with the current yields. Operation Twist was done on Thursday at 6.15% and if RBI had agreed to sell the G-secs at 6.22% today, yields would have shot up to that level. RBI has, therefore, done the right thing. It will have to be more aggressive with higher open market operations or Operation Twist going forward to ensure that yields cool off,” the treasury official at a public sector bank said.

The yield on the benchmark 10-year bond closed at 6.14% on Friday, down 1 basis point from its previous close.

Over the last four weeks, yields have risen by 36 basis points over worries that retail inflation could cross 7% in three months, even as economic recovery lags.

“This is perhaps the first time that the entire auction has devolved on PDs. We don’t know what the rationale behind this move by the government and RBI is. This will mean RBI will have to do more OMOs and Operation Twists to cool off the yields,” said A. Prasanna, chief economist, ICICI Securities PD.

On Thursday, the RBI conducted another Operation Twist, agreeing to simultaneously buy and sell government bonds for ₹10,000 crore.

The central bank is conducting another edition of this programme on 3 September.

Typically, the central bank conducts OMO sales to drain liquidity in the financial system and OMO purchases to infuse liquidity.

Under Operation Twist, RBI will purchase securities with tenures between 4 and 12 years, and sell short-dated securities maturing in October and November.