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Higher RBI cut-off move surprises bond market

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BS Reporter Mumbai
Last Updated : Jan 21 2013 | 2:33 AM IST

Devolvement at year’s first auction of the benchmark paper; likely precursor of more rises in interest rates.

The Reserve Bank of India’s (RBI’s) decision to set a higher cut-off and the ensuing partial devolvement in this financial year’s first auction for 10-year government bonds today pushed up bond yields by about 22 basis points.

Dealers said RBI sold the one-year benchmark paper (6.35 per cent, 2020 paper) at a higher yield than the market had estimated. The bond was being reissued.

The closing yield on the benchmark was 8.01 per cent, as against 7.79 on Thursday, according to Negotiated Dealing System data.

The auction for the 10-year paper for Rs 5,000 crore got 181 bids for Rs 7,880.65 crore. RBI accepted 141 bids worth Rs 4,544 crore. The cut-off price was Rs 89.20, resulting in a yield of 7.96 per cent, higher than the market forecast of 7.90 per cent. The underwriters bought bonds worth Rs 448.54 crore.

Bonds fell sharply as the cut-off yield on the 10-year bond was higher than what the market expected, said Srinivasa Raghavan, head of fixed-income trading at IDBI Gilts.

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The government raised Rs 12,000 crore by selling bonds maturing in 2012, 2020 and 2027.

The treasury head of a large public sector bank said through higher cut-off, RBI was sending a signal to the market to be ready for hardening of interest rates and not be taken by surprise when it (RBI) hikes short-term policy rates later. While this would prepare the market for a future hike, RBI is equally concerned about controlling the rise in yields as that will mean a higher interest burden for the government.

The government plans to complete 63 per cent of its annual borrowing of Rs 4,57,000 crore by the end of September.

It is difficult for investors to accommodate the supply pressure. There was little scope to make gains as yields were expected to rise in the near term, said an executive with a mid-size public sector bank.

Meanwhile, the rupee rose to a fresh 19-month high, as the rise in stock markets raised expectations of more capital inflows in the coming weeks.

The rupee ended at 44.28/29 per dollar, off an intra-day peak of 44.23, its highest since September 8, 2008, and 0.4 per cent stronger than Thursday’s closing of 44.46/47.

NW18 reports: RBI’s decision to devolve the most-traded 6.35 per cent, 2020 gilt might have shaved off half a rupee from the market, but North Block is not unduly worried.

“I think the part-devolvement is due to the speculation with regard to the new 10-year bond,” said a senior finance ministry official.

“Otherwise, the auction for the rest of the gilts went off smoothly. I expect this to continue for the rest of the borrowing programme.”

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First Published: Apr 10 2010 | 12:28 AM IST

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