The Reserve Bank of India (RBI) on Thursday partially devolved the government bond auction upon primary dealers for the second time in as many weeks. The devolvement of an auction generally signifies that the central bank is not willing to accept bids at yields higher than what it is comfortable with.
The total amount devolved was Rs 21,594 crore, with Rs 10,700 crore worth of the 5.15% GS 2025 bond and Rs 10,894 crore of the 5.85% GS 2030 bond being allotted to primary dealers. The RBI sold Rs 2,000 crore of the 3.96% GS 2022 at 4.33% and Rs 7,000 crore of the New GS 2061 at 6.76%. In Friday’s Rs 26,000-crore auction, the RBI had decided to devolve Rs 6,736 crore of the 6.22% government stock 2035.
The instances of devolvement are yield signals the central bank is sending to the bond market about the levels at which it would like to conduct the government’s borrowing programme. Among other measures, it has also announced a simultaneous purchase and sale of government securities (g-secs) worth Rs 10,000 crore on February 25.
However, a market spooked by the size of the government’s borrowing programme and has been unwilling to see eye to eye with the RBI on price levels. On Thursday, the yield on the benchmark 10-year government bond surged to 6.135% at the close of trade from 6.030% in the previous session.
Market participants say that dealers are still hoping for an open market operation (OMO) calendar for FY22. Hardening crude prices have made them wary of a spike in inflation at a time when the RBI has already started to drain surplus liquidity through the 14-day reverse repo auctions and the rollback of the cash reserve ratio (CRR) reduction.
Dhawal Dalal, CIO-fixed income, Edelweiss AMC, said that the rate cut cycle may be over for the time being and government bond yields could face upward pressure in 2021. “We believe that it will be tricky for bond market to navigate through the maze of heavy supply, hardening of key raw materials and RBI normalising liquidity without any negative impact on yields,” he said, adding, “We expect benchmark 10-year government bond to trade in the range of 6% to 6.25% in the near-term due to higher supply on the long-end with the short-end remaining well anchored due to surplus liquidity and a steady reverse repo rate.”