Bond auction devolves partially, yields harden

Govt sticks to borrowing plan of Rs 2.35 lakh crore in H2

The rise in government bond yields continued as traders sold their portfolio to make way for the new auction held on Monday. However, the bond auction for a notified amount of Rs 15,000 crore devolved partially on primary dealers to the tune of Rs 4,030 crore on Monday, indicating the central bank’s discomfort with higher yields in the long end.

Yields on the 10-year benchmark bond have hardened around 65 basis points  since the Reserve Bank of India (RBI)’s mid-quarter review on Friday in which the central bank unexpectedly raised the repo rate, showing its concern over inflation despite weak growth.

RBI had raised the repo rate by 25 basis points to 7.5 per cent in the mid-quarter review of the monetary policy, which resulted in yields hardening by 39 basis points. On Monday, the yield rose to 8.9 per cent intra-day.

The government will borrow Rs  2.35 lakh crore from the market in the second half (October-March) of the current financial year. This would result in a gross market borrowing of Rs  5.79 lakh crore for the entire financial year announced earlier.  In the auction held on September 6, RBI had cut the auction size from Rs 15,000 crore to Rs 10,000 crore. The difference of Rs 5,000 crore gets adjusted in the second half borrowing calendar. As the government sticks to the borrowing programme in a bid to keep the fiscal deficit at 4.8 per cent of gross domestic product (GDP), the impact of government bond yield movements is expected to be limited. 

“Due to the announcement of second half government borrowing, there will not be much impact as the government sticks to the borrowing programme. The yield on the 10-year government bond may trade in the range of 8.50-9 per cent for the rest of the week,” said S Srinivasaraghavan, head of treasury at Dhanlaxmi Bank. According  to  the issuance calendar of marketable dated securities, RBI will auction Rs 15,000 crore government bonds every week beginning the week of September 30. The last auction will be held in the week beginning February 3 for a notified amount of Rs 10,000 crore. Every week, four government bonds will be auctioned according to the issuance calendar.

  While announcing the borrowing programme, the government had also said an additionally Rs 50,000 crore of borrowing may be there for bond buyback/switch programme during the financial year. However, this has not been a part of the borrowing calendar. According to the street, it may be announced separately. On Tuesday, there is also auction of 12 state-government securities for a notified amount of Rs  9,235 crore and inflation-indexed government bonds for a notified amount of Rs 1,000 crore. Besides, there will be auction of treasury bills for a notified amount of Rs 12,000 crore on Wednesday.  There will also be an auction of government securities for a notified amount of Rs 14,000 crore on Friday. “Keeping these auctions in mind, hopefully, there may be an open market operations purchase of government bonds this week. That will help to ease the liquidity slightly,” said  N S Venkatesh, chief general manager and head of treasury, IDBI Bank, and chairman, Fixed Income Money Market and Derivatives Association of India.

The weakening rupee also dampened sentiments in the bond market. Government bond dealers believe a rise in yields might continue as the rupee is yet to stabilise and interest rates could be increased further during this financial year.

“The rupee weakened due to month-end dollar demand from importers, which is expected to continue this week. The rupee may trade in the range of Rs  61.50-63.50 for the rest of the week,” said Sandeep Gonsalves, forex consultant and dealer, Mecklai and Mecklai.

The rupee ended at Rs  62.60 on Monday, compared with the previous close of Rs  62.28 per dollar.

Call rates finish higher

Call rates rose at the market on Monday on good demand from borrowing banks. The rate finished higher at 9.50 per cent from last Friday’s 9.00 per cent, it moved in a range of 9.70 per cent and 9.25 per cent.RBI under the liquidity adjustment facility purchased securities worth Rs 40,227 crore from 63-bids at the One-day repo auction at a fixed rate of 7.50 per cent. (PTI)