“Although the current 10-year benchmark paper has slipped in relevance on subdued secondary market trading volumes, the RBI’s active yield management helps rationalise interest rate sentiment in the market,” said Vivek Kumar, an economist at QuantEco.
“The new 10-year benchmark yield could now be priced with lower anxiety over any abrupt rise in yield in the near term,” Kumar said.
Different Rate Expectations
In the primary auctions, bond dealers started quoting yields much higher than secondary market levels, resulting in weekly bond sales of dated sovereign paper stumbling. The central bank is also said to have signalled to bidders that they need to stick close to market prices.
The 10-year benchmark bond slipped to become the 13th most traded paper in the secondary market on at least two trading days. On some occasions, there was not a single trade reported on the instrument. A new benchmark paper is expected soon, replacing the incumbent.
“This is a clear case of divergence between RBI and market expectations over rates,” said Madan Sabnavis, chief economist at . “The central bank does not seem to be willing to ease its determination to keep the funding rates under check as it has a larger focus to promote growth.”
Until July 3 this fiscal, the central bank devolved sovereign paper worth Rs 57,193 crore in weekly auctions. It cancelled auctions to the tune of Rs 58,815 crore, fully and partly, show RBI data compiled by QuantEco. Such high devolvement and cancellation have not been seen in recent times.
During the same period in FY21, there was no devolvement of bonds but a partial cancellation of Rs 4,000 crore.
“Even as the RBI is seen convincingly conducting yield management, a section of market dealers still holds expectation of rising rates with global ultra-loose monetary policy coming to an end,” said Soumyajit Niyogi, associate director at India Ratings. “The Indian central bank cannot afford to have high yields as the recovery is still at an early stage, unlike other emerging markets. A strong yield management sends enough signals to bond dealers.”
Brazil, Mexico and Russia have recently raised benchmark rates.
RBI Friday decided to move to a uniform price auction of some benchmark government bonds to avoid volatility and too wide a difference with the market prices of those securities.
