Surprise demand at a special auction of government debt on Thursday spurred talk that state-run banks and primary dealers were scooping up bonds to sell to the Reserve Bank of India as other investors pulled back. The RBI’s recent market interventions, including this week’s open market operation, have helped anchor the benchmark 10-year yield below 6 per cent.
“The market reaction indicates that the central bank may keep benchmark yields below 6 per cent to 6.10 per cent through a combination of primary and secondary market intervention,” said Ritesh Bhusari, deputy general manager for treasury at South Indian Bank. “Otherwise, there is a lack of genuine commercial demand.”
The central bank’s actions show its commitment to keeping borrowing costs in check as the government sells debt at a record pace to support the economy through the pandemic. The RBI’s challenge is to reassure market participants that it will stick to its accommodative stance, even as it starts to unwind its emergency liquidity measures.
The government will sell 2.16 trillion rupees of bonds in February through March, 800 billion rupees more than its earlier target. It has another 12.1 trillion rupees of sovereign debt supply lined up for next year.
The bond auctions Thursday drew lower-than-expected cutoff yields, including 5.9726 per cent on the benchmark 10-year note, compared with 6.03 per cent estimated in a Bloomberg News survey.
Around 250 billion rupees ($3.4 billion) of government bonds were snapped up in the secondary market by a category of buyers that includes the monetary authority as well as pension funds and insurers, according to data from the Clearing Corp. of India. State-run banks and primary dealers were combined sellers of a similar amount.
“RBI has tried to assuage the market that by being action-oriented and sending a clear signal, they are going to be the balancing factor in the demand-supply mismatch of government bonds,” said Madhavi Arora, lead economist at Emkay Global Financial Services Ltd. in Mumbai.