RBI may set 6.72-6.79% coupon on new 10-year benchmark bond at weekly bond auction on Oct 4

Bonds

The Reserve Bank of India (RBI) is expected to set coupon rate on the new 10-year benchmark bond in the range of 6.72-6.79 percent at its weekly bond auction on Friday, money market experts said.

This marks a 30-35 basis point (bps) drop from the current benchmark bond's coupon rate of 7.10 percent. One basis point is one-hundredth of a percentage point.

“Both domestic and foreign Investors will gauge the impact of all conditions and it is expected that the cut-off for the new G-sec should lie around 6.70-6.72 percent,” said Umesh Kumar Tulsyan, managing director of Sovereign Global Markets, a New Delhi-based fund house.

Gopal Tripathi, Head of Treasury at Jana Small Finance Bank, said the coupon rate on the new benchmark bond could range between 6.77 percent and 6.79 percent.

The central bank has announced the issuance of the new 10-year bond worth Rs 22,000 crore on September 30. The auction for this bond will take place on October 4, as per the RBI’s notification.

The auction will be conducted using multiple price method. Both competitive and non-competitive bids for the auction should be submitted in electronic format on the Reserve Bank of India Core Banking Solution (E-Kuber) system on October 04, 2024, the RBI said.

Easing yields

In the last few months, yields on government securities eased sharply due to various domestic and international factors. This includes easing domestic inflation, the inclusion of Indian bonds in the JP Morgan Global Bond Index, high consistent growth, and rate cut expectations in the advanced economies leading to a fall in US Treasury yields.

On June 28, JP Morgan included Indian bonds in its bond index. Since the inclusion announcement, Indian bonds have seen sharp inflows from foreign investors.

The sharp fall in yield on government securities and rate pause by the RBI since the last monetary policies led to a narrowing of the spread between 10-year government securities and repo rate to a seven-year low in September.

The 10-year benchmark bond 7.10 percent 2034 traded at 6.7587 percent at 1:31 pm on Thursday.

Going ahead, experts believe that tensions in the Middle East could pose a bump to the bond yield rally.

“The recent escalation in the Middle East, which has driven up crude prices, may dampen inflows and pose a speed bump for the bond rally. Against this backdrop, I anticipate that the rally in yields will persist, with minor fluctuations,” said V Ramachandra Reddy, Head Treasury at The Karur Vysya Bank.

Crude oil prices surged amid escalating Middle East tensions, raising concerns over potential supply disruptions from the key oil-producing region. Higher oil prices pose a challenge for importers like India, where crude accounts for a large share of the import bill.

Adding to this, Mataprasad Pandey, Vice President, Arete Capital Service, said rising crude oil prices, US bond yield and domestic inflation and growth dynamics would affect the Indian bond yields going forward.