MUMBAI: The Reserve Bank of India (RBI) could not find takers for about Rs 25,000 crore of government bonds at reasonable rates as bidders demanded higher yields, pointing to the challenges North Block’s principal money manager faces in preventing a spiral in debt costs.
The benchmark yield surged 11 basis points Thursday, mimicking the recent hardening of rates in the US.
“There is poor appetite for government bonds,” said Lakshmi Iyer, chief investment officer (debt) and head of products, Kotak Mahindra Asset Management Co. “The market lacks clarity on how the excess supply will be absorbed. There seems to be a disconnect between the RBI guidance and market behaviour.”
The benchmark yielded 6.14 percent Thursday versus 6.03 percent a day earlier. The central bank was aiming to borrow Rs 31,000 crore through a primary auction against which it ended up raising a little more than Rs 6,000 crore.
“Credit and growth cycles are turning. Traders are tweaking the rate expectations accordingly,” said a senior bond trader working with a large financial institution. “Yields may drift higher.”
Two sets of sovereign papers worth Rs 21,594 crore, with five- and ten-year maturities, devolved on bond houses. The central bank did not sell the full sum of a 41-year series with some traders demanding about nine basis points higher than the cut-off rate.
Bond traders are now staring at an elevated benchmark yield, which can rise as much as 6.25 percent in absence of any further regulatory measures.
“The RBI is under pressure to lower yields, which may not be in sync with market determined levels,” said another trader.
In the latest Budget proposal, the government planned to borrow additional funds. Moreover, the government announced a gross borrowing of Rs 12.06 lakh crore next financial year, much higher than estimated. Additionally, it is borrowing Rs 80,000 crore this financial year.