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A day ahead of the monetary policy announcement, the Reserve Bank of India devolved bulk of the 5 year bond on primary dealers at the weekly government bond auction. Over one fourth of the 2050 paper too devolved on PDs. The yield on 10 year bond closed at 5.99% down from its previous close of 6.006%

The central bank had planned to sell 11,000 crore of 5 year bonds and 7000 crore of 2050 bonds. This was part of the 32,000 crore of auction of four bonds. However, the central bank devolved the amount on primary dealers as it refused to pay the higher yield sought by them. When underwriters of bonds, mostly primary dealers, are forced to buy the unsold bonds, it is called devolvement.

Of the four government bonds to be auctioned on Thursday, the two bonds devolved on PDs are the 5.63% GS 2026 and 6.67% GS 2050. However the central bank bought the entire 4000 crore of FRB 2033 paper and 12,586 crore of 6.64% GS 2035 paper.

Traders say that the market is expecting a higher yield for the bonds being auctioned as liquidity surplus has reduced in the system by over 2 lakh crore over the last 2 months. The government is also expected to borrow an additional 1.58 trillion to compensate states for the goods and service tax shortfall through back to back loans like last year. Additionally, RBI has also restored the cash reserve ratio (CRR) back to 4%, after it was cut last year as part of the liquidity measures. CRR is the amount of cash that banks are required to maintain with the RBI at zero interest.

In the last auction held on 28 May, Central Government borrowed 26,550 crs, of which bids worth 19,114 crs was accepted by the RBI while 7,437 crs was devolved to the primary dealers. The government has so far raised 2.1 lakh crore in FY22, which accounts for 17.5% of the total budgeted borrowing of 12.05 lakh core.

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