India central bank’s hard line on 2032 paper draws swift reaction from investors

MUMBAI: Indian government bonds bounced from lows on Friday, with yields reversing course after the central bank rejected all bids for the seven-year paper at a debt auction, signalling its discomfort with high borrowing costs.

The Reserve Bank of India planned to raise 110 billion rupees ($1.25 billion) from the sale of the 6.28% 2032 bond, but did not accept any bids. It instead sold other notes, including green bonds, worth a total of 210 billion rupees.

“With such a market, only the RBI could do something to revive sentiment and this was a good step in that direction or else, we would have seen more selloff next week,” Vijay Sharma, senior executive vice-president at PNB Gilts, said.

India’s 10-year benchmark bond yield slipped to 6.55% from the day’s high of 6.59%, while the seven-year 2032 yield declined 4 bps to 6.42%.

Indian bond yields have risen in recent sessions, especially after hawkish commentary from the Federal Reserve clouded the outlook for U.S. rate cut in December.

Further, uncertainty around the RBI’s liquidity policy as well as its own December policy decision is discouraging investors from entering at fresh positions, even at elevated yields.

“Before the auction results, most market participants were willing to wait to enter at higher levels, but now we will have to see how things pan out next week,” a senior treasury official at a large private bank said.

GREEN BOND CONUNDRUM

Meanwhile, markets were surprised that the 2054 green bonds were sold at 5 basis points lower than the 7.24% 2055 bond.

“Investors are also participating in issuances of green bonds, from both government and private companies, as awareness increases and regulators encourage participation,” said Ritesh Taksali, chief investment officer at Edelweiss Life Insurance.

Most market participants said the issue was largely subscribed by a big state-run insurance company, and that such demand may be a one-off instance unlikely to help the green bond market grow in terms of liquidity and tradeability, they said.

The government must follow the reissuance concept for green bonds, which will aid in increasing liquidity and commanding a premium, Taksali said.

Market participants have long asked for investment in such papers to incentivised, such as providing tax breaks or other business benefits.