The cost of borrowing short-term money for the government has risen massively as the centre has to pay investors an annualised coupon interest of 11% to borrow from the bond market on Thursday.
RBI had set a cut-off yield of 11.17% on the 28-day cash management bills (CMB) at Thursday’s auction through which the government borrowed R3,000 crore. In May 2010, when CMBs were first introduced, the government had borrowed R6,000 crore but at a far cheaper rate of 3.87%. CMBs are intruments with tenure of less than one-year through which the government borrows funds to meet its near-term requirements.
At Thursday’s auction, the central bank set a cutoff yield of 11.20% on the 56-day CMBs that were also offered. The central bank conducts auctions on behalf of the government to raise funds from the bond market. Long-term government bond yields have surged more than 30 basis points in just two days after the RBI announced liquidity tightening measures in order to make the rupee dearer and thus quell demand for the dollar.
However, in a sign that demand in the bond market could pick up, the commission to primary dealers for underwriting Friday’s bond auction was set at 32 paise per rs 100 for the shorter tenure 2015 bond compared with 42 paise in the previous auction last week.
“Most traders have cut their bond holdings in a big way during this week and they could now buy bonds as the cutoff yields could be higher,” said a bond trader at a public sector bank.
