RBI cancels bids for Rs 11,000-cr bonds

The Reserve Bank of India (RBI) on Friday refused to accept bids for Rs 11,000 crore worth of bonds in the final auction of this calendar year.

In all, four bonds for Rs 15,000 crore were on offer. Bids for two bonds--one maturing in 2022 (Rs 3,000 crore on offer) and another in 2031 (Rs 8,000 crore)—were rejected by the central bank. It sold the remaining two bonds worth Rs 2,000 crore each and maturing in 2033 and 2046.

The signal from the RBI has been that high yields would not be acceptable to the central bank or the government. Also, and that the yield movement have been over the top in a short span.

The decision not to accept bids for two bonds addressed some of the market concerns related to liquidity after the government announcement on Thursday that it was going for additional borrowing of Rs 50,000 crore.

"The partial cancellation of the auction means that the government has a comfortable cash position and is unwilling to pay high coupons," said Piyush Wadhwa, head of trading at IDFC Bank. Following the auction results, bond yields fell 15 basis points to 7.25 per cent in the intraday, before climbing back to close at 7.33 per cent, from its previous close at 7.40 per cent.

This is a marginal relief for banks as they will now have to provide lower nominal losses on their bond portfolio. Nevertheless, considering the 10-year bond yield was at 6.648 per cent at the start of the quarter, the yield movement is still at 68 basis points in the quarter. The bank treasury, therefore, will have to take a hit on their books.

According to bond dealers, nationalized banks were buyers in the market, whereas foreign banks were on a selling spree following government’s extra borrowing announcement.

Nationalised banks were particularly buying some illiquid stocks so that yields fall and mark-to market losses are minimized, said bond dealers.

However, such yield management is not possible in the benchmark segments as liquidity in those stocks is significant.

Banks are also limited by the liquidity in hand. Data shows liquidity has shrunken considerably in recent period. For example, banks borrowed to the tune of Rs 36,604 crore as of Thursday, according to RBI data. Friday’sfigure will come on Monday, but it is likely that banks may have turned net borrower. This is contrary to what banks have been doing in the recent months as they were sitting on high liquidity following demonetisation. The government, meanwhile, had a cash balance of about Rs 4,500 crore as on December 23, RBI data showed. Unless the government starts spending this money, yields would continue to be under pressure, dealers said.

“Liquidity is tight in the system and therefore banks have demanded higher yields. But no government would want to borrow at this price,” said Srinivasa Raghavan, CFO of KBS Local Area Bank.

RBI’s yield signal is important, but may not be enough in the long term as banks are satiated with their bond holdings. But supply of papers would continue this year and may even rise next financial year. Dealers say the auction has not been cancelled, but ‘postponed’ and the government is likely to return with another auction date for the Rs 11,000-crore portion.

"Investors don't have strong expectations of yields going up or down, but the risk appetite is severely hit as banks are sitting on about 9 per cent of excess SLR and they have suffered huge MTM losses in those," said Wadhwa.