New 10-year benchmark government bond issued at cut-off yield of 6.1%

The new 10-year benchmark government bond was issued at a cut-off yield of 6.1 percent, the Reserve Bank of India (RBI) said on July 9.

The cut-off came in a little higher than what most market participants had expected it to be -- ranging anywhere between 6.05 percent and 6.08 percent. In Friday’s auction, where tranches of two existing bonds were also re-issued, there was no devolvement upon primary dealers. The central bank issued Rs 14,000 crore of the new benchmark, Rs 3,000 crore of the 4.26 GS 2023 and Rs 9,000 crore of the 6.76 percent GS 2061. Trade in the money markets has been relatively thin this week.

“From here on, we are likely to see thin trade because there has to be some amount of supply of the new paper coming in. Also, much of the old benchmark 5.85 percent GOI 2030 is now with the RBI,” said Madhavi Arora, Lead Economist, Emkay Global Financial Services. There has been a demand-supply issue in the market for a while now, which the RBI has been trying to control, to some extent, with its bond purchases, Arora said.

In several bond auctions conducted over the last few months, the RBI has chosen to devolve bonds on primary dealers and underwriters when it felt that the yields being quoted were too high.

The central bank has been running a programme called the government securities acquisition programme (G-SAP) to manage the excess supply of paper in the market. Earlier this week, yields had hardened after the RBI announced the first leg of G-SAP auctions for the July-September quarter and did not include any of the active benchmark securities in its list.

At the same time, macroeconomic factors like rising inflation and movements in global bond prices are also driving yields up. Consumer inflation hit a six-month high of 6.3 percent in May and the price of Brent crude shot up to around $80 levels this week. These factors will continue to play on the minds of market participants.

Most people in the market are of the view that for the time being, the monetary policy committee (MPC) will stick to prioritising growth over curbing inflation. “Of course, inflation is a concern, but that won’t lead them to change their stance. However, the market will remain a little nervous and may start repricing,” said a market participant on condition of anonymity.

He pointed to the example of the US, where Treasury yields have risen despite the Federal Reserve not touching rates. “So the market will start repricing to account for factors like inflation, crude prices and global bond prices, and eventually the RBI may reconsider its stance,” he said.

Emkay’s Arora expects inflation to remain above six percent in the next few months. “That might create something of a divide between MPC members. But what will determine the trajectory of yields thereafter will be the supply of paper in the second half of the year,” Arora said.