RBI forced underwriters of government bond auctions to buy nearly a third of the instruments for sale on Friday as markets demanded higher interest rates.
Out of the Rs 24,000 crore bonds offered in the auction, the central bank decentralized or let the insurers buy Rs 7267,683 crore. That is about 30 per cent. of the total bond auction mainly on medium-term maturity segment. The last such devolution took place on 30 July.
“The signal to us was very clear. Do not be opportunistic,” said a senior bond trader with a private bank, requesting anonymity.
Bond yields have risen steadily as global central banks began to sound hawkish, and the RBI is signaling that it is no longer willing to pursue its light monetary policy.
It participates in short-term reverse repo variable rate (VRRR) auctions and rolls it back to remove excess liquidity from the system. Although this is voluntary, the higher rates act as an incentive for the banks. On Friday, the central bank again announced a three-day VRRR for Rs 2 trillion. The auction will be held on Monday.
The 10-year bond yield closed Friday at 6.4617 percent, largely stable from its previous close.
On Friday, RBI let primary traders buy Rs 1,697,915 crore from its Rs 2,000 crore auction of a bond maturing in 2023. Similarly, of Rs 6,000 crore planned for the five-year bond, primary dealers were to buy Rs 4,402 crore. But the auctions with higher leases were allowed to sail through. The Rs 9,000 crore bond maturing in 2035 witnessed the decentralization of Rs 867,084 crore, while the entire Rs 7,000 crore share in the 2051 bond was fully auctioned.
“As liquidity is removed from the system, the bond market demands more returns on short-term bonds. But the RBI signal is that it is there with liquidity and the market should not panic. The development in short-term bonds indicates (sic) that, ”said the dealer.