RBI Rejects Seven-Year Bond Bids as Yields Touch 6.6%

Context:

The Reserve Bank of India (RBI) cancelled the auction for the seven-year government bond after market participants demanded a yield of around 6.6%, a level the central bank found unacceptable.

Key Highlights:

• The government had planned to sell ₹11,000 crore worth of 6.28% 2032 bonds.
• Market participants said accepting such high bids would have sent a negative signal and pushed yields further up.
• Following the RBI’s decision, bond yields softened, with the 10-year benchmark yield settling at 6.53%, down from 6.57% the previous day.
• The seven-year bond, considered relatively illiquid and mainly held by banks, was trading at 6.46%, later easing to 6.43%.

Reasons for Weak Bidding:

• Public sector banks (PSBs) were absent from the auction due to existing mark-to-market (MTM) losses and reluctance to take on more risk.
• Bidding weakened after a technical breakout at 6.56%, prompting cautious sentiment among dealers.
• Banks are not adding new bonds to their Held-to-Maturity (HTM) portfolios following the April 2024 RBI investment portfolio norms, which make reclassification between categories (HTM, AFS, FVTPL) more restrictive.

Revised RBI Framework:

• Portfolios must be classified under HTM, Available-for-Sale (AFS), or Fair Value Through Profit or Loss (FVTPL).
• The Held-for-Trading category has been merged into FVTPL, with daily or quarterly fair valuation required.
• Only 5% of the HTM portfolio can be shifted in a year.

Key Terms

• Held-To-Maturity (HTM): Securities meant to be held until maturity and valued at amortized cost.
• Available-for-Sale (AFS): Securities that can be sold before maturity and are periodically fair-valued.
• Fair Value Through Profit or Loss (FVTPL): Trading or fair-value-managed securities whose gains/losses are reflected in profit or loss.
• Held-for-Trading (HFT): Merged into FVTPL; securities held for short-term profit through active trading.
• Amortized Cost: The original purchase cost adjusted for interest income and repayments over time.
• Fair Value (Mark-to-Market): The current market price of a security used for valuation.
• Other Comprehensive Income (OCI): Accounting category where unrealised AFS gains/losses are recorded outside profit or loss.