India's 10 year bond yield steady despite ballooning government borrowing program

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India's 10 year bond yield steady despite ballooning government borrowing program

- The benchmark yield in India's one-trillion dollar government bond market is remarkably stable despite a ballooning government borrowing program. A possible reason for the lull is that the central bank now holds more than half of the closely watched 10-year bond.

The Reserve Bank of India retracted its holding of the 5.85% 2030 bond to 545 billion rupees or at least 22% of the total by Operation Twists, two tranches of the government securities acquisition program and indirectly via a special auction in February, reports Bloomberg calculations show. The number is likely even higher if the secondary purchases of the RBI are incorporated.

That does dwarf the bank of Japan's 21% holding of its bond from March 2031. The comparison is sharp because the Japanese central bank has a specific commitment to control the yield of its benchmark.

The RBI repeatedly denied that it wants to keep the 10 year yield anchored at around 6% even though the market sees that as a signal in the sand for the central bank. A Central Bank spokesman wasn't immediately available for comment.

To be sure, the BOJ hasn't needed to handle as much of the latest issue to maintain its yield target under current market conditions. The BOJ still holds 48.4% of Japanese government bonds, while the RBI holds 15.7% of Indian sovereign debt as of December.

The RBI buying has helped India's 10 year yield to remain in a range of 6 -- 5 -- 9-6% since last month, even after the government said in late May that it plans to raise an additional 1.58 trillion rupees on top of its plans to finance 12 trillion rupees in the current fiscal year. However, the overwhelming influence of RBI in the most sovereign part of the liquid yield curve is raising concerns that investors might be crowded out.

'The purchase of the 10 year bond by the RBI helps keep the segment of the yield curve in check, but not the entire curve, said Arvind Chari, chief investment officer at Quantum Advisors Pvt. It makes the fixed stock highly likely to go out of business and shortening the bond. ''

Some also see it complicating the efforts of the central bank to bring in more foreign investment into the nation's debt. Foreign bonds are the only ones in Asia today where investors face India on a year-to-date basis, even as their 10 year yields are the second-highest yield under investment-grade sovereigns in the region after Indonesia. On Wednesday, India's 10-year yield rose one basis point to 6.02%.

While RBI's holding of the current 10-year bond hasn't had a big impact on liquidity so far, liquid investors who want to invest would need a clear signal that it would be offshore in the future, according to Rajeev Pawar, head of treasury at the Ujjivan Small Finance Bank. If they don't lose interest, they will lose gradually, he said.

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