RBI may set 6.45-6.55% coupon on new 2032 gilts at weekly bond auction

The market is expecting a lower cut-off due to decent expected demand, with most investors waiting for the new benchmark bond as the current benchmark gilt has reached an outstanding amount of `1.5 lakh crore.

On Thursday, the current benchmark 6.10%-2031 bond yield ended at 6.5610%.
On Thursday, the current benchmark 6.10%-2031 bond yield ended at 6.5610%.

By Manish M Suvarna

The Reserve Bank of India (RBI) is expected to set a 6.45-6.55% coupon on the new benchmark bond GS 2032 at the weekly bond auction on Friday, which would be marginally lower than the prevailing yield on the current benchmark bond in the secondary market, market participants said.

On Thursday, the current benchmark 6.10%-2031 bond yield ended at 6.5610%.

The market is expecting a lower cut-off due to decent expected demand, with most investors waiting for the new benchmark bond as the current benchmark gilt has reached an outstanding amount of Rs 1.5 lakh crore.

“New 10-year bond shall be auctioned this Friday and looks like most market participants have been waiting and kept space to accommodate it. The new paper shall be 8-10 basis points lower in yield,” said Ajay Manglunia, MD and head – institutional fixed income, at JM Financial.

The new benchmark bond is likely to fetch good demand from investors, but factors in the global and domestic market are likely to affect investment. A dealer with a state-owned bank said demand for new papers is usually there, with all traders and banks set to buy this bond, and the auction is expected to sail through without any devolvement.

“We expect new benchmark to be fully subscribed,” said Puneet Pal, head – fixed income, PGIM India Mutual Fund.

“I think the new 10-year bond cut-off should come around 6.50%. Being a new benchmark security, it may attract a decent demand in the auction,” said Pankaj Pathak, fund manager – fixed income, at Quantum Asset Management.

The rise in December’s inflation print is unlikely to hit demand for a new benchmark, because market players believe the average of third-quarter consumer price inflation is marginally lower than the expectations given by the RBI in the December monetary policy. The average of October-December 2021 inflation stood at 5%, marginally lower than the 5.1% estimate given by the RBI. Adding to this, likely buying by the RBI in the secondary ahead of a weekly bond auction is expected to support yields.

The yield on the current benchmark has risen more than 13 basis points in a few days due to uncertainty among traders owing to rising crude oil prices and US Treasury yields. The rise in oil prices posed inflationary pressures domestically and rising US Treasury yields forced foreign players to shift their investments from an emerging market to developed economies in search of a better return.

Devolvement and cancellation of the auction by the central bank have also put pressure on bond yields, but this time, too, devolvement is expected by a few players. “A devolvement remains a realistic possibility in the weekly bond auction,” said Sandeep Yadav, senior vice president and head – fixed income, DSP Investment Managers.

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