Biggest gilt devolvement shows RBI’s intent on rate – Times of India

Mumbai: The RBI on Friday stepped in to stem the spike in benchmark yields on 10-year government bonds as rising yields recently have been threatening the central bank’s efforts to lower interest rate for buyers of home, car and consumer goods, etc, and also for India Inc. Higher yields, to a large extent, have an impact on interest rates in the market. As a result, the central bank is trying to keep the benchmark yield from rising so that the interest rates in the economy also remain lower, market players said.
On Friday, the RBI refused to sell government bonds worth almost Rs 18,000 crore at higher yields and sent a strong signal to the bond market that it would not want this benchmark to cross the 6.2% level, bond dealers said. Because of this, almost 60% of the government’s Rs 30,000-crore weekly borrowing remained unsold (devolved). This is the biggest G-sec devolvement ever and all of it was in the benchmark 10-year paper. It’s also the second devolvement in three weeks.
This clearly indicates a tug of war between the RBI, which wants to hold yields at current levels, and traders who want to push it up, dealers said. In two weeks, the benchmark yield had hardened to a six-month high of 6.22% from 5.8% but cooled to 6.10-6.15% level after the RBI on Monday announced two open market operations (OMOs).
“Devolvement of almost entire primary auction quantity of 10-year benchmark at a yield lower than the market is very strong yield-signalling by the RBI,” said Ram Kamal Samanta, VP (investment), Star Union Dai-ichi Life Insurance. “This action followed by the aggressive OMO purchase in operation twist (last week) indicates the RBI’s lower tolerance for spike in 10-year yield beyond 6.2% amid muted economic activity.” On Dalal Street, however, strong foreign fund buying pushed the sensex to a new 6-month closing high at 39,467 on Friday as banks and financials rallied.