The government on Friday paid more for 10-year money than it has since 2011, raising R7,000 crore at a coupon of 8.83%. The 10-year bonds were auctioned by the Reserve Bank of India (RBI). The coupon reflects the prevailing high yields in the gilts market characterised by tight liquidity conditions and a heavy supply of government securities.
The coupon on the new 10-year bond was roughly 30 basis points below the yield on the current 10-year bond which settled at 9.10% on Friday, up from 9.08% Thursday. The new 10-year bond was in big demand with investors scrambling to get hold of the future benchmark. While the cut-off yield on the benchmark paper was set at 8.83% in the secondary market, the yield dropped to a low of 8.77%. Investors are understood to have sold off most bonds, except the new 10-year benchmark paper, on worries rising inflation may drive up policy rates and that the US Federal Reserve may soon start scaling back its monthly bond purchases of $85 billion under its quantitative easing programme.
Meanwhile, the rupee slipped below 63 in intra-day trade but closed marginally stronger at 62.86 on Friday compared with the previous close of 62.94. For the week, the rupee gained 0.4% against the dollar, snapping a five week losing spree. Central bank intervention on Thursday and Friday supported the rupee after fears of a tapering in the Federal Reserve’s bond-buying programme hit emerging market currencies. The offshore markets, however, continue to reflect further weakness in the currency with the one-month contract in the non-deliverable forwards (NDF) market trading at near 63.40.
In 2011, the government had issued 10-year bonds at a coupon rate of 8.79% at a time when the RBI’s benchmark repo rate — the rate at which the central bank lends to banks — was at 8.5%; currently the repo is at 7.75%.
However, the operational rate is considered to be closer to the marginal standing facility (MSF) rate — considered the penal rate — of 8.75% given the tight liquidity conditions. Yields, however, are unlikely to come down much further, especially ahead of the RBI’s mid-quarter monetary policy review in December, where some expect another hike of 25 basis points in the repo rate.
The weak sentiment in the bond market was reflected even in the auction where along with the new 10-year benchmark bond three other bonds were sold. Although there was no