Since the markets were seeking higher yields for the five-year and 10-year bonds being issued, the central bank devolved nearly the entire bond auction on primary dealers on Friday.
After the Reserve Bank of India (RBI) signalled its displeasure with higher rates, the bond market is bracing for another year of yields below 6% on 10-year instruments.
On Friday, the central bank devolved nearly the entire bond sale to primary dealers, citing investor demand for higher yields on the five-year and 10-year bonds being sold.
The central bank announced on Monday that it will buy bonds worth Rs 20,000 crore from secondary markets on Wednesday.
Bond dealers now expect such open market operations (OMO) to be a popular trend for the remainder of this fiscal year, and to continue in the next one as well. The RBI, on the other hand, is still not in the mood to issue an OMO calendar, as some market participants had anticipated. Bond dealers are now predicting that the RBI will intervene as and when yields rise, rather than on a set schedule.
One thing is certain at this stage. The industry is no longer operating under standard market dynamics. Gross borrowing is expected to exceed Rs 13 trillion this fiscal year. Borrowing is expected to total Rs 12 trillion in the coming year. Bond holders are not responsible for absorbing such demand. The Reserve Bank of India (RBI) would have to chip in to indirectly purchase a substantial portion of it.
“In this form of heavy borrowing, the pricing power leaves the market and falls into the hands of the regulator for the second year in a row. According to Jayesh Mehta, head of treasury at Bank of America, “the RBI will now have to draw a ceiling and send clear signals around those levels about its comfort.”
Clearly, the amount of comfort has dropped below 6%.
Following the RBI’s OMO announcements, the 10-year bond yield closed at 6.04 percent on Monday. It had closed at 6.08 percent on Friday, but was trading at 6.12 percent following the monetary policy announcement and prior to the auction cancellations.
The market now expects the OMO to be at least Rs 3 trillion in the next fiscal year, just as it was in the previous one, regardless of an OMO calendar. Bond dealers believe that if such strong OMO support is obtained in the coming fiscal year, 10-year yields will stay below 6% without much difficulty.
According to senior bond dealers, RBI Governor Shaktikanta Das sees low yield as a public good, but the organisation appears to be focused on giving signals primarily on the 10-year segment.
“While the signal is centred on the 10-year market, yields across the board have remained elevated. If the RBI does interfere, it must do so through the curve, rather than targeting a specific tenure, according to a senior bond dealer.
“It’s not because the industry is unable to work together. However, the RBI must first demonstrate that it is acting, which it did not do in the regulation. If the market is convinced that the RBI is present, it will calm down and respond only to new events,” another bond dealer predicted.
According to bond dealers, the market panicked after the Budget because the RBI went silent. Due to the three-day meetings of the monetary policy committee (MPC), the RBI made no comment on the high borrowing programme in the Budget, nor did it take any action that would calm bond dealers’ nerves.
Investors, according to bond dealers, are sitting on losses that they can’t afford to widen. “The market was spooked by the policy’s lack of intervention. What does it mean when the RBI says borrowing will go smoothly? At what point does it become smooth? One of the bond dealers quoted above said, “The market needed to hear.”
According to bond dealers, the market is attempting to predict the central bank’s decisions, but those actions should be timely so that major course correction measures are avoided later.