RBI may announce new 10-year benchmark bond on August 7, say experts

According to money market dealers, the coupon on the new benchmark bond is expected to set between 7.10 percent and 7.20 percent.

The Reserve Bank of India (RBI) is likely to announce the new 10-year benchmark bond on the first Monday of August, money market experts said.

“We expect the RBI to announce the new 10-year benchmark on August 7, with the auction on August 11,” said Shantanu Godambe, vice president, investments, DSP Mutual Fund.

The announcement of the new benchmark bond is expected as the current 10-year benchmark bond 7.26 percent 2033 has reached an outstanding amount of Rs 1.5 lakh crore, as per RBI data.

The current 10-year benchmark bond was issued on February 3.

Traditionally, the central bank issues a new benchmark bond whenever the current bond reaches an outstanding amount to Rs 1.5 lakh crore.

Sanjay Pawar, fund manager, fixed income, LIC Mutual Fund Asset Management, explained this saying that the outstanding limit is set so that repayment of the maturity proceeds is distributed in a staggered manner.

He added that the limit amount changes with time according to market appetite to absorb sudden liquidity and the government’s ability to sustain its outflow on a single day. Earlier this limit was Rs 1 lakh crore.

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What could be the coupon on the new bond?

According to money market dealers, the coupon on the new benchmark bond is expected to set between 7.10 percent and 7.20 percent and the maturity will be 2033.

Pawar of LIC Mutual said the bond may fetch a discount of 3-5 basis points (bps) over the yield on the current benchmark bond at the time of issuance.

Similarly, Arun Bansal, head, treasury, IDBI Bank, said yield level at the time of issue of the new benchmark will decide the coupon and as given earlier it may be 2-3 bps lower than the 10 year yield level at that time.

One basis point is one-hundredth of a percentage point. Currently, the yield on the 10-year benchmark bond 7.26 percent 2033 is trading at 7.1753 percent.

Dealers further said the auction of the new benchmark bond is expected to take place on August 11 and bidding will take place in multiple price method. Under the multiple price method, successful bidders have to pay for the allotted government securities at the respective rate they have bid.

Umesh Kumar Tulsyan, managing director of Sovereign Global Markets, a New Delhi-based fund house, said there are various factors players will consider before bidding for the bonds. These include Consumer Price Index expectations, monetary policy rate, the outcome of the policy statement, market sentiment and global policy rates (US).

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Previous benchmark bonds

Earlier this year, the central bank issued a new 10-year benchmark bond where the coupon was set at 7.26 percent, and raised Rs 12,000 crore. The coupon set was identical to the previous benchmark bond of 7.26 percent 2032. Dealers said that the similar coupon set on the bonds at that time can be attributed to the lower yields in the market after the budget.

At that time, the yield on the 10-year benchmark bond was trading at 7.2887 percent.

The central bank issued Rs 12,000 crore worth of 10-year benchmark bonds 7.26 percent 2033 in the initial two auctions, but later the amount was increased to Rs 14,000 crore.

The increase in amount was witnessed after the government increased the market borrowing for FY24. So since the start of the current financial year, the amount on the benchmark bond increased to Rs 14,000 crore.

In Budget 2023, Finance Minister Nirmala Sitharaman said the Centre would borrow a record Rs 15.43 lakh crore from the markets in 2023-24 to finance its fiscal deficit of 5.9 percent of gross domestic product.

On a net basis, the Centre's borrowing for the current fiscal has been pegged at Rs 11.8 lakh crore, up from Rs 11.19 lakh crore in 2022-23.