RBI sells new benchmark paper, calms bond dealers
09 Jul 2021
MUMBAI: The Reserve Bank of India (RBI), the government’s investment banker, introduced a new benchmark paper in the weekly auction Friday, prompting investors to buy into the debt offering 25 basis points more than the coupon on an equivalent outgoing series.
Mint Road received more than double the bids than the scheduled size of Rs 14,000 crore for those sovereign securities, which will mature in 2031, with coupons pegged at 6.10 per cent now. The whole auction was for Rs 26,000 crore, including two other sets of short and long maturity papers.
“The new benchmark yield came in line with market expectation,” said Vijay Sharma, executive vice president for fixed income at PNB GILTS. “Surprisingly, RBI did not devolve this paper at lower than market determined rates. Investors also showed interest in owning those papers. The problem of liquidity in the benchmark series will be over by the next few weeks, and volatility is likely to recede unless retail inflation prints surprise us.”
India will report its latest consumer price inflation statistics Monday. It is expected to be in the range of 6.40-6.70 per cent for June. If it crosses the upper limit, it will trigger another round of volatility in the government bond market.
“The new benchmark yield was a reflection of the RBI’s rational thought process,” said Marzban Irani, CIO – debt, LIC MF. “Yields should be market determined, which in turn helps maintain overall equilibrium. Trading activities should rise now in GSecs.”
In the When Issued market, a price discovery platform that runs a set of new papers a week ahead of its formal auction, the recently introduced series initially yielded 6.17 per cent before settling at 6.09 per cent.
Global crude oil prices dropped about 2 per cent since the beginning of the month, diminishing chances of imported inflation for India.
The outgoing benchmark paper carrying a coupon of 5.85 per cent turned completely illiquid in the past few weeks. It slipped to 13th most traded security in the secondary market. On a few occasions, there was not a single traded report on the series, known as off-the-run in market parlance.
The central bank has either cancelled or devolved on bond houses a record sum of Rs 1,16,008 crore in weekly gsec auctions this financial year, demonstrating its determination to keep funding rates under check. India’s benchmark rates have hovered around 6 per cent even as several emerging markets stepped up rates to restrain inflation.
Mexico, Brazil and Russia have already raised their benchmark rates.