RBI has 300 billion rupee auction test after rejecting bids

By Subhadip Sircar

The Reserve Bank of India will again have a tough choice at Friday’s bond sale: Whether to ask underwriters to rescue the sale or allow higher yields.

The central bank plans to sell 300 billion rupees ($4 billion) of bonds, including 180 billion rupees of benchmark 10-year securities, in the last auction of the fiscal first half that ends Sept. 30. Sovereign bonds opened lower ahead of the sale, with the 10-year yield rising 2 basis points to 6.01 per cent.

The RBI has a huge task managing the federal government’s record borrowing program without wading into debt monetization like Indonesia. Prime Minister Narendra Modi’s administration is set to outline its October-March borrowing by the end of the month and is widely expected to breach its 12 trillion rupees target for the year.

The RBI on Thursday chose not to accept any bonds at a 100 billion rupee auction, which traders said was an indication that the central bank didn’t want to signal it will accept yields rising much further. After rejecting the bids, the central bank quickly announced an operation twist for 100 billion rupees for Oct. 1.
Traders said the central bank’s actions Thursday may prove to be inadequate to support bond prices. Naveen Singh, head of fixed income trading at ICICI Securities Primary Dealership Ltd. in Mumbai., said he expects muted demand at the auction on Friday.

Underwriters have had to rescue three of the last six auctions as investors demanded higher yields amid supply worries.