Government securities (G-Secs) prices rose on Friday despite the Reserve Bank of India (RBI) devolving the 10-year benchmark G-Sec on primary dealers (PDs) at the weekly auction.

Market participants attributed this to the aforementioned security being among the six G-Secs RBI will be buying under the third tranche of open market purchase of G-Secs under the G-Sec Acquisition Programme (G-SAP 1.0).

Though the cut-off price at the auction of the 10-year G-Sec came in at ₹98.97 — about 19 paise higher than previous closing price (of ₹98.7850) — bond dealers say many of the bids would have been below Thursday’s closing price, leading to devolvement of the paper PDs.

PDs, who underwrite G-Sec auctions, had to pick up ₹9975.763 crore worth of this paper out of the total notified amount of ₹14,000 crore.

Marzban Irani, CIO-Fixed Income, LIC Mutual Fund, said the central bank has kept the yield on the 10-year on a tight leash in view of the large Government borrowing programme amid the Covid-19 pandemic, while the market players want it to leave the yields to market forces.

Keeping yields in check

Irani observed that G-Sec prices did not fall despite devolvement of the 10-year G-Sec on PDs as market participants know that RBI will buy this security through G-SAP.

In the secondary market, the benchmark 10-year G-Sec coupon rate: 5.85 per cent) rose 9 paise to close at ₹98.875 (previous close ₹98.785), with the yield declining about a basis point to 6.0072 per cent (6.0199 per cent).

Bond yield and price are inversely related and move in opposite directions.

The auction of the other two G-Secs — 4.26 per cent GS 2023 and 6.76 per cent GS 2061 — sailed through.

Under G-SAP, RBI commits upfront to a specific amount of open market purchases of G-Secs with a view to enabling a stable and orderly evolution of the yield curve amidst comfortable liquidity conditions. According to State Bank of India’s economic research report “Ecowrap”, the G-SAP programme of the RBI has been largely successful in keeping the bond yields in check.

However, to make the impact more meaningful, RBI may consider shifting the focus on 7-8 year papers while announcing Open Market Operation/ G-SAP, etc., it added.

“This will smoothen the curve and also reduce upward pressure on benchmark yield. Additionally, RBI can also come up with a prior calendar of bucket-wise maturity for GSAP-2.0,” Soumya Kanti Ghosh, Group Chief Economic Adviser, SBI, said.

Furthermore, more purchases might be done in illiquid securities compared to liquid securities in each bucket. Accordingly, banks will be able to offload their HTM (held-to-maturity) stocks and buy liquid ones.

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