RBI goes for lower cutoff to rein in rate fears

The Reserve Bank of India (RBI) today sought to calm rising interest rate concerns by fixing the cut-off at the auction of 10-year government bond below market expectations, even at the risk of devolvement.

The auction of Rs 7,000 crore of government bonds devolved to the extent of Rs 5,281 crore on primary dealers as the RBI fixed the cut-off yield at 8.29 per cent for the 7.59 per cent 2016 bond and 8.75 per cent for the 7.50 per cent 2034 bond.

Bond dealers were left guessing on how to interpret the first case of devolvement of an auction in over a year despite the banking system being awash with surplus liquidity of about Rs 54,000 crore.

Immediately after the auction, the yield on the 10-year bond spiked to 8.36 per cent from 8.28 per cent, the yesterday's closing level at which it was trading before the auction results. The 10-year yield finally closed at 8.32 per cent.

Market players are of the view that the RBI has hinted at its discomfort at a sharp rise in interest rates even at the cost of devolvement.

The RBI today accepted only 20 bids for Rs 1,590 crore for the 10-year 7.59 per cent bond from the 159 bids it received for Rs 7,571 crore against a notified amount of Rs 5,000 crore.

Similarly, in the long term 7.50 per cent government bond 2034, only 15 bids were accepted for Rs 104 crore from 64 bids received for Rs 4,085 crore against a notified amount of Rs 2,000 crore.

Dealers said the cut off yield is far below the bids put forth by participants. Most of the bids received by RBI were closer to a yield of 8.34 per cent for the 10-year bond.

The yields had started rising soon after the announcement of the government securities auction. Market dealers are furthering expecting the government to cancel the next scheduled auction.

On June 28, the RBI did not receive the full subscription to the 91- day and 182 day treasury bill auctions even as the RBI absorbed around Rs 42,000 crore from the market.

The RBI accepted total subscription of Rs 1,075 crore for 91 day and Rs 1100 crore for 182 day as against notified amount of Rs 2000 crore and Rs 1500 crore, respectively.