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Informist, Friday, Nov. 29, 2024

 

By Aaryan Khanna

 

NEW DELHI – The Reserve Bank of India on Friday devolved a bond at auction on underwriters for the first time in 21 months. Bond market dealers saw it as a sign of the government's flagging cash balance.

 

Of the notified amount of INR 50 billion, the central bank devolved INR 34.98 billion of a new 10-year, 2034 green bond on primary dealers on Friday, the first since February 2023. It set the coupon at 6.79%, the same as the yield on the 10-year benchmark gilt. While demand for green bonds has been lacklustre for all three auctions through the year so far, the government had opted to skip its issuances earlier due to its robust cash position, dealers said.

 

In the first offering on May 31, the RBI rejected all bids for INR 60 billion of a new 10-year green bond. In the second offering on Aug. 2, the government only accepted bids worth INR 16.97 billion against INR 60 billion notified. 

 

"Naturally, a cancellation shows that the government has no need for the funds," the head of trading at a private bank said. "In the current circumstances, when the government is running low on cash, a devolvement was the only other option."

 

Earlier in the year, the government's cash surpluses had swelled to nearly INR 5 trillion as it had limited avenues to spend during the General Elections. Data released Friday showed the government's receipts were on a downtrend in October, at a time when it had sharply cut short-term borrowing and given generous devolutions to states.

 

Overall tax collection in October was the lowest in five months, according to data released by the Controller General of Accounts Friday. The Centre's total receipts were 50% lower on year at INR 861 billion, with net tax revenue falling 72% to INR 398 billion in October. At the same time, the government's Apr-Nov net Treasury bill issuances are around INR (-)2 trillion, dealers said.

 

Consequently, by Nov. 15, the government needed to dip into the RBI's ways and means advances facility for INR 118.17 billion to meet a temporary cash mismatch. Kotak Mahindra Bank estimated the Centre's cash balances would consolidate at INR 1.1 trillion by Friday, with another drain coming from the month-end payments for salaries and pensions due until early next week.

 

This made it imperative that the government continue with its scheduled borrowing this week, no matter how unpopular the paper on offer, dealers said. The government does not typically deviate from its half-yearly borrowing calendar, and opting to issue a bond other than the green bond that was scheduled would have raised more jitters. As it was, the devolved amount did not have a large impact on the bond market. The 10-year benchmark yield inched up, but was only around 1 basis point above the day's low at the time.

 

What did surprise the market was that the central bank could not foist the bond on investors using its usual persuasion. The RBI Friday likely directed some state-owned banks and insurers to pick up the bond at auction to ensure it sails through, dealers said. One state-owned bank confirmed it was encouraged by the central bank to pick up the bond at auction.

 

"The government insists on offering the bond to the market. It will catch up to them, because nobody ever wants to buy it," a dealer at a state-owned bank said. "They will always have to push it through."

 

Going ahead, the bond market does not see a weakness in the appetite for bonds, though the demand for green bonds is likely to be pedestrian compared to other gilts. Interest rate cut hopes in December were reignited after GDP fell to a seven-quarter low of 5.4% in Jul-Sept, according to data released after the auction. The 10-year benchmark gilt yield fell by 6 basis points Friday, the most in nearly 10 months, to 6.74%. In the rising tide, even the devolved 6.79%, 2034 green bond was lifted. It ended 3 basis points lower than its coupon, at 6.76%.  End

 

IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT

 

Edited by Akul Nishant Akhoury

 

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