India has no plans to cancel bond auctions despite spike in yields: source

By Neha Dasgupta

NEW DELHI (Reuters) - India's government is unlikely to cancel bond auctions despite a spike in bond yields as it does not want to trigger panic in financial markets, a senior finance ministry official said on Friday.

The official said the Reserve Bank of India will engage with primary dealers and tweak the bond issuance basket to ensure auctions go smoothly.

The RBI was not immediately available for comment.

"We have decided that RBI will keep taking a sense of the market at every auction. RBI will also talk to the primary dealers to tweak the (issuance) basket," the official said, adding, "We are mature borrowers and we cannot scare the market by cancelling a 100-150 billion rupee bond auction."

The RBI failed to sell all the debt it offered to bidders at the last four auctions in a row, which has given rise to concerns in the government that aims to borrow a total 6.05 trillion rupees ($89.87 billion) in the current fiscal year that started in April.

Finance ministry officials have asked the central bank to re-issue older bonds that are widely held by market participants, and shorter tenure bonds to ensure auctions go through smoothly, the official said.

Economic Affairs Secretary Subhash Chandra Garg will review the bond market's recent volatility later on Friday, the official said.

Earlier this week, Indian bonds weakened to multi-year lows as global crude oil prices surged and local inflation data came in higher than expected.

The 10-year benchmark bond yield was down seven basis points on the day at 7.81 percent. It had risen to 7.90 percent on Tuesday, its highest since Aug. 25 2015.

Markets were also awaiting results of the latest auction held earlier in the day.

"The RBI and government have to coordinate steps to address the dislocation in bond market. Given that projections imply a need for infusion of some durable liquidity, the RBI could carry out a few more bond purchases preferably targeted at the short-end" said A. Prasanna, chief economist at ICICI Securities Primary Dealership.

(Reporting by Neha Dasgupta; Additional reporting by Abhirup Roy and Devidutta Tripathi in MUMBAI; Editing by Sam Holmes and Kim Coghill)