The RBI accepted bids worth R2,532 crore, a fraction of the R12,000-crore worth of bonds it had offered to sell through the open market operation (OMO) auction.
Bankers indicated that some of the bids may have come in below current market yields, which could have been the reason for the RBI rejecting the bids. They added that the rejection of bids at the treasury bill auctions on Wednesday and the OMO auction on Thursday indicate that perhaps the central bank wants to repair some of the damage done by measures that it took to stabilise the rupee.
At some point in time, you have to protect the investors and you cannot just increase the governments borrowing cost, said Jayesh Mehta, MD and head of global markets at Bank of America-Merrill Lynch.
Mehta said that given the weak sentiment in the market, the government's scheduled bond auction on Friday could also get a tepid response and perhaps devolve.
The government aims to borrow Rs 15,000 crore from the bond market through a scheduled auction on Friday.
"The signals from the RBI have been conflicting," said Ajay Marwaha, head of trading at HDFC Bank. "Perhaps if they had accepted all bids, they would have taken a hit of 10-15 basis points."
"Why would you announce the OMO in the first place when you want to reject it If you see the bids, there was no want of buying interest from banks," observed a treasurer from a public sector bank. The central bank had received bids worth a whopping Rs 24,279 crore at the OMO auction.
Bond yields eased and the benchmark 7.16% 2023 bond yield settled at 8%, down 5 basis points from Wednesday's closing level.
Late on Monday, the RBI had tightened liquidity by capping banks' borrowings from the daily repo window at Rs 75,000 crore. It also announced its intention to suck out Rs 12,000 crore in liquidity through Thursday's sale of bonds.
The rationale was to make rupee scarcer and thereby prop up its value relative to the dollar. The measures had led to a sharp spike in bond market yields.
However, the rejection of the bids by the central bank, both at the T-bill auctions on Wednesday and the OMO auction on Thursday, indicated that the RBI could be rolling back part of its measures after the strong reaction from the market. Further, bond traders said that the central bank is not comfortable with the current yield levels.
"The bids were rejected because the central bank was not comfortable with the current yields. So the yields will now come lower, which is happening," said KN Reghunathan, general manager of treasury at Union Bank of India.
Dealers said that the 10-year benchmark bond yield could ease further but the fall may not sustain.