RBI decided to conduct uniform price auction for issuance of benchmark securities of 2-year tenor, 3-year tenor, 5-year tenor, 10-year tenor & 14-year tenor and Floating Rate Bonds (FRBs). However, for benchmark securities of 30-year and 40-year, auction will continue to be multiple price-based auction.
In a uniform price auction, bonds are given to bidders at one single cut off price, while in a multiple price auction, bidders get bonds at the price at which they bid. Given that RBI is controlling benchmark yields, a uniform price auction is seen as highly negative for bond dealers as the price is not market determined.
RBI is auctioning a new 10-year benchmark paper maturing in 2031, which is to be auctioned on 9th July. This new paper has been quoted at 6.15% on 6th July 21.
In a consequence to change in auction method, bond market is worried as market participants are uncertain whether they will be able to buy g-sec at the desired price or not. This has led to government bonds being sold off in the market, which can be seen in the yield movement of benchmark bonds as compared to previous day. On 6th July 21, 10-year benchmark paper, 5.85% 2030 yield rose by 9 bps to 6.18% as compared to previous day’s closing level. In the same line, 6.18% 2024 yield moved up by 10 bps to 5.36% while 6.64% 2035 yield gained 8 bps to reach at 6.81%. On the other hand, 6.57% 2033 yield remained unchanged at 6.68% as compared to previous day’s level.
Cut-off yield of SDL auction too witnessed rise in yields. 10-year SDL auction yield stood at 6.99% from 6.94% in previous week.
RBI’s best efforts to keep benchmark yields stable through auction cancellations, auction devolvement, bond purchases through OMO, G-SAP, moral suasion, high system liquidity and ambitious inflation forecasts have not been successful with segments of the yield curve rising sharply. Bond markets are showing concern on rising inflation expectations and high fiscal deficit.
Although India received above average rain during June 21, the rainfall distribution was unequal throughout the month. This is evident from the data that by 21st June, India had already received 37% above normal rainfall while during 21st to 30th June, domestic rainfall was 47% below normal rainfall.
The below normal monsoons since 21st June 2021 have given rise to prospects of high food prices even as global oil and commodity prices are rising sharply. The government announced additional stimulus of over Rs 6 trillion last week to counter the disruptions caused due to covid 19 lockdowns. This will increase the already high fiscal deficit from budgeted 6.8% of GDP levels.
Commodity | 1-year change (%) |
Gold | 0.00 |
Silver | 45.24 |
Copper | 58.54 |
Nickel | 41.25 |
Aluminum | 60.54 |
Brent Oil | 77.71 |
Crude Oil | 86.30 |
The yield on 6.57% 2033 bond at 6.7% is 50 bps above the 5.85% 2030 bond, the yield of which RBI is controlling. The 7.16% 2050 bond yield is at 7.20% levels, 102 bps over the 10-year bond. Yields on these bonds have spiked in the last one month. SDL yields too have risen sharply.
During last one month, 5.85% 2030 gained 17 bps to 6.18% while 6.57% 2033 rose by 11 bps to 6.68%. In the same line 7.16% 2050 increased by 24 bps to 7.20% during the same period.
RBI is still trying to manage the yields on the benchmark bonds by changing the auction methodology from multiple price, which allows the market to bid at the price it wants to uniform price, which makes RBI give the bonds to the market at a single cut off price. RBI also devolved most of the benchmark 5 year bond auction on to the primary dealers in the last auction.
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