The central bank on Friday devolved nearly the entire bond auction on primary dealers, as the markets were demanding higher yields for five-year and 10-year bonds being sold
The bond market is getting ready for another year of below 6 per cent yields on 10-year instruments after the Reserve Bank of India (RBI) gave signals about its displeasure of higher rates.
The central bank on Friday devolved nearly the entire bond auction on primary dealers, as the markets were demanding higher yields for five-year and 10-year bonds being sold.
On Monday, the central bank said it would buy bonds worth Rs 20,000 crore from the secondary markets on Wednesday.
Such open market operations (OMO) are now expected to be a common theme for the remainder of this fiscal year, and will continue in the next one as well, bond dealers are now expecting. However, the RBI is still not in a mood to issue an OMO calendar, which was the expectation in some sections of the market. That calendar is unlikely to come; rather, the RBI would want to intervene as and when yields rise, bond dealers are now saying.
One thing is certain now. It is no longer normal market dynamics that are playing out in the market. In this fiscal year, gross borrowing would cross Rs 13 trillion. For the next year, borrowing has been estimated at Rs 12 trillion. It is not the job of bond investors to absorb such demand. The RBI has to chip in to buy a large chunk of it indirectly.
“In these kinds of heavy borrowing, that too for the second year in a row, the pricing power leaves the market and goes to the regulator’s hands. The RBI will now have to draw a ceiling and give strong signals around those levels about its comfort,” said Jayesh Mehta, head of treasury at Bank of America.
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