The government on Friday paid more for 10-year money than it has since 2011, raising R7,000 crore at a coupon of 8.83%. The 10-year bonds were auctioned by the Reserve Bank of India (RBI). The coupon reflects the prevailing high yields in the gilts market characterised by tight liquidity conditions and a heavy supply of government securities.
The coupon on the new 10-year bond was roughly 30 basis points below the yield on the current 10-year bond which settled at 9.10% on Friday, up from 9.08% Thursday. The new 10-year bond was in big demand with investors scrambling to get hold of the future benchmark. While the cut-off yield on the benchmark paper was set at 8.83% in the secondary market, the yield dropped to a low of 8.77%. Investors are understood to have sold off most bonds, except the new 10-year benchmark paper, on worries rising inflation may drive up policy rates and that the US Federal Reserve may soon start scaling back its monthly bond purchases of $85 billion under its quantitative easing programme.
Meanwhile, the rupee slipped below 63 in intra-day trade but closed marginally stronger at 62.86 on Friday compared with the previous close of 62.94. For the week, the rupee gained 0.4% against the dollar, snapping a five week losing spree. Central bank intervention on Thursday and Friday supported the rupee after fears of a tapering in the Federal Reserve’s bond-buying programme hit emerging market currencies. The offshore markets, however, continue to reflect further weakness in the currency with the one-month contract in the non-deliverable forwards (NDF) market trading at near 63.40.
In 2011, the government had issued 10-year bonds at a coupon rate of 8.79% at a time when the RBI’s benchmark repo rate — the rate at which the central bank lends to banks — was at 8.5%; currently the repo is at 7.75%.
However, the operational rate is considered to be closer to the marginal standing facility (MSF) rate — considered the penal rate — of 8.75% given the tight liquidity conditions. Yields, however, are unlikely to come down much further, especially ahead of