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Benchmark paper regains “most liquid” tag

Benchmark paper regains “most liquid” tag

13 Sep 2021

MUMBAI: India’s already shallow bond market turned almost dry with investor interest fading even from the so-called benchmark bond a few months ago as the market and the Reserve Bank of India couldn’t agree on what the right price was. That seems to be changing.

Benchmark 10-year government bonds yet again became the most traded fixed-income security on Monday for the first time this fiscal after the central bank appeared to be giving up its resistance for higher yields. Bonds worth Rs 6,630 crore changed hands through 731 trades. The move should help streamline both federal and corporate borrowings.

“With the benchmark bonds regaining its stature the bond market appears perfectly aligned,” said Naveen Singh, head of trading at ICICI Securities Primary Dealership. “In the past few weekly auctions, the central bank allowed the market to chart out its own natural path. This prompted investors to take new bets on the benchmark.’’

Ever since the government announced its borrowing plan for the fiscal in February this year bond investors have been pushing up the yields higher saying the state could crowd out private investments. With inflation running above the central bank’s target of 4 percent in a two percent band on either side, traders were factoring in slow normalisation of excess liquidity that could lead to higher interest rates. But the central bank, determined to keep borrowing costs low, was rejecting higher bids in weekly auctions. But the central bank has begun accepting higher yields and reduced its direct interventions to push yields down.

The benchmark bonds have an outstanding stock of Rs 56,000 crore. The paper lost liquidity slipping into the 13th most traded security a few months ago. Last week, it was mostly third traded security. The benchmark bond bearing a coupon of 6.10 percent rose to as high as 6.28 percent in the last six to seven weeks. It yielded at 6.19% Monday.

On August 6, the Reserve Bank of India did not accept bids for the benchmark paper in the auction. Before that, there were occasions of repeated cancellation or devolvement of other securities prompting bond dealers to stay off from new bets.

However, the scene changed in the past four weekly auctions at least with the central bank accepting market bids almost in full.

On August 20, the RBI accepted a cut-off yield, above which none can bid, at 6.23 percent, which was in sync with the market price.

“Rising level of activity in the secondary market is a clear sign of growing investor interests in India’s government bonds,” said Dhawal Dalal, chief investment officer – fixed income at Edelweiss Mutual Fund. “FPIs (Foreign Portfolio Investors) are warming up to India’s benchmark sovereign bonds amid expectations of their inclusion in global bond indices.”

Preparation for including India’s government bonds in global bond indices is on. Morgan Stanley expects nearly $250 billion to flow into Indian government bonds over the next decade when it happens.