RBI Issued 10 Year Gsec at 6.10%
- On 10 july 2021 The Reserve Bank of India announced the cut-off yield for the new 10-year bond at 6.10% per annum, higher than that of the current benchmark, signalling a slight tolerance for a higher yield after months of trying to keep it at 6% or less.
- RBI sold ₹14,000 crore of the new 2031 bond as part of the ₹26,000 crore planned weekly government security auction.
- The central bank also sold ₹3,000 crore of 2023 bonds at 4.3% and ₹9,000 crore of 2061 bonds at 7.18%.
- The previous 10-year benchmark paper has been trading in the secondary market at around 6.18%. Since 28 May, the 10-year paper has either seen a devolvement of large bids or cancellation of the instrument.
- This was the first auction after 21 May when there was no devolvement of bids to primary dealers or a greenshoe option exercised for any instrument, Care Ratings said in a note.
- While the transition to a new benchmark is a standard procedure every year, it assumes significance as the market was not willing to accept a lower yield for the 5.85% paper with trading volumes also coming down, said Madan Sabnavis, chief economist at Care Ratings.
- For a considerable period, the Reserve Bank has been locked in a tussle with bond market investors to keep yields below 6% and, consequently, keep the government’s borrowing costs low, despite rising inflation and supply concerns.
- “This new paper at 6.1% is a signal to the market. It would need to be seen from Monday onwards whether this yield remains stable or moves up, given that the inflation threat is high. The Consumer Price Index (CPI) number to be announced on Monday will also provide some direction subsequently,” he said.
- The government has so far raised ₹78 trillion in FY22. This is nearly 31.4% of the total budgeted borrowing limit of ₹12.05 trillion.
- RBI and the bond market entered into a tug of war over bond yields soon after the government announced the ₹12 trillion government borrowing plan, driven by higher public spending to boost growth during the pandemic.
- To keep the yields at desired levels, the central bank has been buying G-sec (government securities) in the secondary market through steps such as the government security acquisition programme (GSAP) to keep the yields anchored around the 6% mark and, in the process, buying almost 80% of the total 10-year benchmark bonds in circulation, which experts said has resulted in the paper becoming illiquid.
- Bond yields had been rising over the past few weeks as inflation remained above the Reserve Bank’s targeted levels amid worries that an increase in global crude oil prices would feed further into inflation.
- However, yields softened a bit after RBI governor Shaktikanta Das, in an interview earlier this week, said that the central bank is committed to ensuring the lowest possible costs for the government’s borrowings.
What is a Bond?
- A bond is a debt instrument in which an investor loans money to an entity (typically corporate or government) which borrows the funds for a defined period of time at a variable or fixed interest rate.
- Bonds are used by companies, municipalities, states and sovereign governments to raise money to finance a variety of projects and activities. Owners of bonds are debt holders, or creditors, of the issuer.
What is a Government Security (G-Sec)?
- A Government Security (G-Sec) is a tradeable instrument issued by the Central Government or the State Governments.
- It acknowledges the Government’s debt obligation. Such securities are short term (usually called treasury bills, with original maturities of less than one year) or long term (usually called Government bonds or dated securities with original maturity of one year or more).
- In India, the Central Government issues both, treasury bills and bonds or dated securities while the State Governments issue only bonds or dated securities, which are called the State Development Loans (SDLs). G-Secs carry practically no risk of default and, hence, are called risk-free gilt-edged instruments.
Why should one invest in G-Secs?
Holding of cash in excess of the day-to-day needs (idle funds) does not give any return. Investment in gold has attendant problems in regard to appraising its purity, valuation, warehousing and safe custody, etc. In comparison, investing in G-Secs has the following advantages:
- Besides providing a return in the form of coupons (interest), G-Secs offer the maximum safety as they carry the Sovereign’s commitment for payment of interest and repayment of principal.
- They can be held in book entry, i.e., dematerialized/ scripless form, thus, obviating the need for safekeeping. They can also be held in physical form.
- G-Secs are available in a wide range of maturities from 91 days to as long as 40 years to suit the duration of varied liability structure of various institutions.
- G-Secs can be sold easily in the secondary market to meet cash requirements.
- G-Secs can also be used as collateral to borrow funds in the repo market.
- Securities such as State Development Loans (SDLs) and Special Securities (Oil bonds, UDAY bonds etc) provide attractive yields.
- The settlement system for trading in G-Secs, which is based on Delivery versus Payment (DvP), is a very simple, safe and efficient system of settlement. The DvP mechanism ensures transfer of securities by the seller of securities simultaneously with transfer of funds from the buyer of the securities, thereby mitigating the settlement risk.
- G-Sec prices are readily available due to a liquid and active secondary market and a transparent price dissemination mechanism
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