Yet another bond auction dud: What's RBI's game plan?

Bond yields dropped today after the central bank sold bonds worth just over Rs 2,000 crore in the open market today. RBI's lower than announced bond sale comes after it rejected bids in yesterday treasury-bill auction.

Also Read: Falling rupee puts pressure on RBI at $2 bn debt sale

"You (RBI) announce tightening measures 72 hours ago and then in 30-odd hours you chicken out! You reject a T-bill auction and allow Rs 11,000 crore of liquidity into the system. You tightened it in the first place and then today another rejection. What's going on RBI?" a flabbergasted CNBC-TV18's Latha Venkatesh questions.

Below is an edited transcript of CNBC-TV18's reaction to the confusing RBI move

When RBI announced the measures on Monday night, it did look like it was determined to keep the market extremely tight, so that people don't use rupee resources to punt long on the dollar. Part of the money tightening measure was that it will conduct the open market operations (OMO) on Thursday, where when it will sell bonds and absorb Rs 12,000 crore from the market.

The T-bill auction was also expected to keep that money away from the market. However, after keeping the market tight for a day, and people scampered to get their certificate of deposit (CD) money in order, the RBI has now allowed Rs 11,000 crore into the system by the rejection of the T-Bill bids yesterday and today by accepting only Rs 2,500 crore out of an expected Rs 12,000 crore of bonds that it was expected to sell.

So, the market is loose now. Everybody has covered for the money they want and there is more cash than anyone expected and that is why you saw bond yields crash, people going and parking their money in bonds. The underlying reading of the market is that the RBI probably is confused that there is over reaction in the money market and in the bond market to its measures and is therefore rolling back. It doesn't speak well of a central bank, which has not been able to gauge the reaction to its policies as well is rolling back or is at least seen to be rolling back steps announced just 48 hours or 72 hours ago.

The picture is not just a matter of confusion in the minds of the market men but also the feeling that the central bank is not quite in charge and at least is not communicating what is in its mind and not following through with what it has announced. It leaves a very confused and a bad taste in the mouth to say the least.

On market reaction 

Money market reacts immediately because the results have come even as the money market is operating. Already, one had seen call rates crash after yesterday's T-bill bids not being accepted; call is back to that 7.25-7.5-mark and you have seen the yields on the 10-year rollback from 8.11 percent to 7.92 percent after the results were announced for the OMO. Clearly, the market is already reacted and tomorrow there is going to see a further fallback of yields and rise in bond prices, bank stocks will really go through the roof because they were shorted so much on the belief that the RBI could even announce a repo rate hike sometime—that it is so serious about protecting the rupee.

Now all those interpretations of the central bank tightness will have to be reconsidered and it is a huge short covering that could come about in the stock markets.