India’s New 10-Year Bond Issued At Below 7% Yield

The Reserve Bank of India (RBI) on Friday issued a new series of benchmark 10-year government bonds at the lowest yields since 2009. The lower yields, reflecting the interest paid on these notes, are a consequence of easier liquidity conditions in the market which has helped push down market borrowing rates.

The new 10-year benchmark bonds maturing in 2026 were issued at a cut-off yield of 6.97 percent, 15 basis points lower than the current benchmark which is trading with a yield of 7.12 percent. The lower yield is not surprising as bond traders typically bid aggressively for a new benchmark in the first auction in order to add it to their portfolios.

The RBI sold Rs 8,000 crore of the new benchmark bonds as part of today’s auctions. “The yields are in line with expectations. We expect the new 10-year bond yield to trade close to 7 percent mark,” said Lakshmi Iyer, chief investment officer - debt and head-products at Kotak Mahindra Asset Management Co.

The sub-7 percent yield set on the benchmark bond translated into lower borrowing costs for the government and for corporates. Rates have been falling since the middle of June when Raghuram Rajan announced his decision to step down as RBI governor.

While hopes of more dovish monetary policy under a new governor are unlikely to play out under governor designate Urjit Patel, comfortable liquidity conditions and a fall in global bond yields are factors that have supported lower borrowing costs in India.

Since June 20, the first trading day after Rajan announced his departure, yields have fallen from 7.48 percent to below 7 percent now. Short term corporate borrowing costs have fallen even more. The rate of interest on 3-month commercial paper, used by companies to meet short term cash needs, has fallen from 7.83 percent on June 20 to 6.97 20 now. “The drop in government bond yields is translating into lower corporate borrowings costs as well since liquidity conditions remain comfortable,” said Iyer.