RBI to issue 40-year bond on Thursday

The Reserve Bank of India (RBI) will be introducing a new 40-year benchmark bond on Thursday, it said in a notification on its website. The 40-year bonds are the highest tenured bonds issued by the government. It was first introduced on 26 October 2015, and the government has raised ~1 trillion from it.

The Reserve Bank of India (RBI) on Friday again offered high underwriting commissions to primary dealers (PDS) to rescue bond auctions as it tries desperate measures to manage the government’s massive borrowing programme at more than a decade low cost.

PDS, the underwriters of bond auctions, were given commissions as high as 50 paise for ~100 face-value bonds maturing in 2050, whereas just 1.24 paise per ~100 had sufficed on April 30, 2020. This is a more than 4,000 per cent rise in commissions for the underwriters, who, despite this, are under immense pressure as the central bank devolves (forces PDS to buy) auctions one after the other.

On Friday, the central bank had to devolve one more auction. Of the ~26,000 crore of bonds scheduled to be sold, the central bank devolved ~6,736 crore of securities maturing in 2035 on PDS.

On Thursday, the central bank had successfully conducted a ~22,000-crore special auction, although, according to market participants, by indirectly buying from the market as a party itself.

In Friday’s auction, the RBI didn’t even sell the full amount of ~5,000 crore it had planned through the 2050 maturity bonds. Instead, it accepted partial interest of up to ~3,500 crore, while exercising greenshoe options for the other two bonds to raise ~2,000 crore and ~625 crore extra.

It’s now clear that the central bank’s target is to keep the 10-year bond yields below 6 per cent, say experts. As yields fall, prices of bonds rise and vice versa. A low yield, according to RBI Governor Shaktikanta Das, is a ‘public good’. But the tension is palpable, say dealers. On Wednesday, it brought down the 10year bond yields to 6 per cent by doing disproportionate buying on the 10-year segment in an open market operation (OMO), a programme through which the central bank buys bonds from the secondary market. In Thursday’s special auction, the 10year yields fell below 6 per cent after the RBI’S suspected behind the scene actions.

On Friday, though, the 10-year yield is back to 6.05 per cent. “The auctions were stretched. It is a test of nerves between the RBI and the bond market. Frankly, the bond market has become greedy, they will now be testing the RBI at every opportunity by pushing up yields, hoping the central bank will come up with OMO measures where the old bonds can be squared off at a marginal profit,” said a senior bond dealer, requesting anonymity.

Others agree that the central bank is in a peculiar position — being the banker to the government, it has to manage two consecutive ~12 trillion-plus borrowing programmes at a cheap rate, and at the same time keeping the market well humored but under a tight leash. In the process, the central bank also has to ensure that the quality of its balance sheet is maintained. It is an impossible trinity, according to experts.

“Given the large borrowing programme and improvement in macro-economic conditions, it is difficult to believe benchmark yield would stay below 6 per cent on a sustainable basis,” said Soumyajit Niyogi, associate director at India Ratings and Research. “Bouts of volatility are normal. By devolving, the RBI is giving signals about its discomfort on the market yields and putting the onus on the market to correct it.”

As for the primary dealers, a high commission is hardly any compensation when they are committing to taking up bonds on their fragile books.

The PDS are not as well capitalised as banks and other investors are. Naturally, they are hitting their limits as to how much bonds they can purchase, faster than ever, say market participants. “Unless there are continuous OMOS, where PDS can offload their old investments, participation in fresh auctions would be difficult. But the central bank has done it successfully in the past, and will do it again,” said a senior official with a PD.