New Delhi: Treasury officials say that India’s central bank has sold its biggest annual net government bond sale in over 10 years in the current financial year, net selling bonds worth of ₹1 trillion.
The pace is anticipated to keep up. It is expected that the RBI will part with another of ₹1 trillion by December, bringing the total to double in a year.
Why the RBI is selling
Sales have been designed to absorb excess cash flow in the banking system. A special window to raise dollars provided liquidity and made overnight rates less than the RBI’s policy rate. It led the central bank to the adjustment of the liquidity conditions. It creates an outlet for selling bonds and brings short term rates close to the policy rate.
Pressure on yields
The transfer reflects a strain on the bond market in India already. The 10-year yield has surged to its highest level in two-and-a-half years, and traders have been as troubled by the government’s borrowing plans as they have been. The October-March borrowing schedule, issued Friday, moves issuance further away from the liquid five and 10-year bonds, and toward 15-year and ultra-long bonds. The headline borrowing figure was barely lower than the previous estimates, but the shift in maturities had a dampening effect on sentiment.
Investors have maintained their sales of government bonds since the government made an announcement to raise funds via 15-, 30- and 40-year bonds in the second half of the fiscal year.
Outlook
Pressure is being felt on both ends of the curve, according to analysts. The longer term yields could remain elevated due to government and state borrowing while shorter term yields may fall due to liquidity operations by RBI, they said.
A tighter system liquidity situation could lead to higher funding pressures for banks and demand less room of comfort for the banks. The government’s problem is that the higher yields on long-term paper will increase the expense of its borrowing schedule in the coming months. The RBI’s heavy net sale indicates that it is prepared to withstand some price volatility in the money-market to maintain its policy stance.
Traders will be keen on upcoming auctions and RBI liquidity injection to see if demand for longer dated debt can cope with the higher supply without pushing yields up.
