The Reserve Bank of India (RBI) logo is displayed at the entrance to the bank’s headquarters in Mumbai, India (Photographer: Kainaz Amaria/Bloomberg)  

RBI Cancels Part Of Government Bond Sale As Yields Rise

The Reserve Bank of India on Friday cancelled part of the scheduled bond auction, signalling that yields have risen too far. The decision sent bond yields tumbling on the last trading day of the current calendar year.

Results from the auction showed that the RBI withdrew the sale of Rs 3,000 crore in bonds due in 2022. It also withdrew the sale of Rs 8,000 crore in bonds due in 2031. Of the total Rs 15,000 crore in bonds up for auction, the RBI sold only Rs 4,000 crore.

The RBI’s decision to defer part of the auction came at the end of a week when yields spiked in response to additional borrowings announced by the government. The government’s decision to borrow another Rs 50,000 crore via dated securities sent bond yields soaring to 7.39 percent on Thursday. By withdrawing part of the auction, RBI has sent a signal that yields have risen too far.

Following news of the cancelled auction, the 10-year benchmark yield dropped sharply to 7.27 percent from 7.35 percent before the auction.

RBI Cancels Part Of Government Bond Sale As Yields Rise

The benchmark 10-year bond yield has risen over 80 basis points in 2017, making it one of the worst years for Indian bonds since 2008. Yields have risen on fears of fiscal slippage and a return of inflation pressures in the economy. In recent months, yields have also spiked due to tightening liquidity, prompting domestic banks to sell their excess bond holdings.

As such, the decline in bond yields on Friday may prove to be short lived.

On Friday, data from the Controller of Government Accounts showed that the government’s fiscal deficit in the April-November period hit 112 percent of the budget target. This is the first time that the full year target has been breached over this period since 2009. Given this, the government is unlikely to meet its fiscal deficit target of 3.2 percent of GDP, said rating agency ICRA in a note on Friday.

Taken together, the fiscal deficit at 112 percent of the FY18 budget estimate up to November 2017, the disappointing GST collections for November 2017 and the recent increase in the Government of India’s issuance calendar, signal a fiscal slippage in FY18.
ICRA

Jayesh Mehta, country treasurer at Bank of America, told BloombergQuint that bond yields will remain elevated till the demand-supply balance for government bonds remains skewed. Demand for bonds from domestic market participants, particularly banks, has come down due to tightening liquidity conditions. Supply, however, has increased due to higher government borrowings.

Even so, the decline in bond yields on Friday will help banks, who will mark-to-market their bond portfolios to the closing price on the last day of the quarter.