Mumbai: The gulf between the Reserve Bank of India and market expectations on yields widened with the central bank failing to sell bonds or letting them devolve on primary dealers, raising the spectre of another battle with investors.
New Delhi’s merchant banker raised only Rs 190 crore of the planned Rs 31,000 crore in government paper.
Bonds worth Rs 8,810 crore devolved, taking the unsold stock to the books of bond houses, known as primary dealers. The central bank rejected bids for the remainder, citing likely higher yield demand.
It failed to sell two sets of longer-term bonds as the yield demanded was more than 12 basis points on the benchmark bond itself, said traders. Two sets of papers maturing in 2025 and 2030 were rejected and are likely to be re-auctioned.
In its bi-monthly monetary policy on Friday, RBI governor Shaktikanta Das promised a smooth sovereign borrowing programme. Such unsold stock of bonds was indicative of the central bank’s strong intent to check yield rise, said bond dealers.
The long-dated papers maturing in 2060 could not find buyers offering commensurate rate as it devolved for Rs 6,837 crore out of the total size of Rs 7,000 crore, show RBI data.
A large insurance company, according to market sources, bid for a lion’s share, offering yields in the range of 6.73-6.75%, which New Delhi’s investment banker did not oblige. The cut-off rate came at 6.70%, above which no one could bid.
“Devolvement in the G-Sec bond auction today was unexpected, especially when the government needs to borrow an additional amount of Rs 80,000 crore in the remainder of the current fiscal year,” said Arun Srinivasan, head of fixed income at ICICI Prudential Life Insurance. “It weighed on the market sentiment as the same paper traded at higher yields as compared to the auction cut-off levels.”
The near 40-year paper yielded at 6.75% in the secondary market after the auction, which was almost 10 basis points higher than the level seen before the weekly primary bond sale.
In the latest budget, the government said it planned to borrow additional funds, throwing the market into disarray. Moreover, the government announced a gross borrowing of Rs 12.06 lakh crore in the next financial year, much higher than average market expectations.
Another set of short-term bonds, up for auction, will mature in 2022. These too did not find buyers who could live up to the RBI’s yield expectations. Bonds worth Rs 1,973 crore devolved out of the slated size of Rs 2,000 crore.