India Signals Tolerance for Higher Yields With Sale of New Bond

An Indian 500 rupee, bottom, and a 2,000 rupee banknotes are arranged for a photograph in Thailand. (Photographer: Brent Lewin/Bloomberg)

India Signals Tolerance for Higher Yields With Sale of New Bond

India’s central bank set a coupon of 6.10% for the new 10-year bond sale, higher than that of the current benchmark, signaling a slight tolerance for higher yields after months of trying to cap them at 6%.

The government sold 140 billion rupees ($1.9 billion) of the new bond as part of a 260-billion rupee sale, the Reserve Bank of India said in a statement on Friday. The yield is higher than the 5.85% coupon for the current benchmark and 6.05% predicted in a Bloomberg survey. Bonds fell after the auction results.

The RBI has been locked in a tussle with the bond market as it strived to anchor yields to keep the government’s borrowing costs low, despite rising inflation and supply concerns. The higher 10-year coupon rate may signal rising yields across the curve.

“This time around RBI is not only comfortable giving slightly higher yield, but also giving the entire stock to the market,” said Harish Agarwal, a fixed-income trader with FirstRand Bank in Mumbai. It’s encouraging that the RBI is likely willing to support the new 10-year around 6.1%, compared to their 6% focus earlier, he said.

India Signals Tolerance for Higher Yields With Sale of New Bond

The cutoff yield for the benchmark 10-year bond is closely watched by the market as it acts as a reference point for the entire gamut of borrowing costs. The yield on current benchmark 10-year note rose six basis points to 6.19% after the auction results.

Bond yields have started rising over the past few weeks as inflation held above the RBI’s 2%-6% comfort zone and accelerating global oil prices stoked fears that the central bank will signal policy normalization in August.

Governor Shaktikanta Das said the RBI is committed to ensuring the lowest possible costs for the government’s borrowings, according to a Business Standard newspaper report published Thursday. Das also denied that the RBI is focusing only on the 10-year note.

“The RBI is realigning to the rising yields, but it will keep the pace gradual,” said Debendra Dash, head of fixed income at AU Small Finance Bank in Mumbai. “I don’t see much demand coming in the secondary market given inflation worries and fears of more borrowing.”

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