RBI Governor reiterates growth priority but bond market snubs assurances

RBI Governor reiterates growth priority but bond market snubs assurances

NEW DELHI: Today’s government bond auction may be the perfect market response to RBI’s monetary policy statement which was released earlier in the day. While RBI Governor Shaktikanta Das repeatedly expressed concerns about growth, the bond market has read into the finer details of the policy.

The 60 basis-point increase in inflation forecast for the financial year, increased quantum of variable rate reverse repos and dissent on stance by an independent member have given clear insights on RBI’s thinking.

Yield on the 10-year benchmark 6.10%, 2031 bond has climbed 3 basis points so far today and was at 6.24% at the time of writing this report. That works out to be 14-basis-point rise in the benchmark yield since July 9th and corresponds to a 98-paise fall in price. Bond yields and prices move inversely.

To make matters worse, the bond is up for auction today. The government held a Rs 14,000 crore auction of the benchmark bond today and two other bonds for a total amount of Rs 26,000 crore.

Most market participants believe that a portion of today’s auction will either have to be rescued by underwriters or suffer rejection of bids as traders are unlikely to bid below 6.25% yield for the benchmark bond.

“The government has already paid 21 paise as underwriting for the 10-year paper so devolvement is 110% likely. After such a large revision in CPI and dissent in MPC voting, there could also be an auction cancellation,” a senior treasury official with a large foreign bank said.

It seems the RBI’s talk of treating the sovereign yield curve as a public good has lost steam. The bond market is finally being given the room to express its view on interest rates, inflation and public finances.

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