The Reserve Bank of India (RBI) seems to have done banks a good turn by rejecting all the bids at the auction of the 10-year government security (G-Sec) and floating rate bond (FRB) on the last day of the third quarter of FY22.

This action led to yields thawing a bit, ensuring banks don’t suffer more treasury losses than they already have in the quarter (October-December 2021).

If the central bank had devolved the aforementioned auctions on the primary dealers (PDs) on December 31, 2021, it could have resulted in an adverse impact, with yield on the benchmark 10-year G-Sec possibly hardening to close Q3 at 6.55 per cent (and its price depreciating to about ₹96.85), said market experts.

This, in turn, would have required a huge marked-to-market (MTM) provisions towards depreciation on the treasury portfolio. Most of the G-Secs usually move in tandem with the 10-year benchmark G-Sec.

The last traded yield of the 10-year benchmark G-Sec was 6.45 per cent as on December-end 2021, up about 23 basis points vis-a-vis the September-end level of 6.22 per cent.

In price terms, this paper ended the reporting quarter about ₹1.60 paise down at ₹97.51 vis-a-vis the September-end level of ₹99.11. Bond prices and yield are inversely co-related and move in opposite directions.

When bond yields rise (and prices fall), banks have to provide for MTM losses on investments classified as available for sale (AFS) and held for trading (HFT).

Bid rejections

RBI rejected all the bids it had received at the auction of the 6.10 per cent 10-year G-Sec (for a notified amount of ₹13,000 crore) and FRB 2028 (₹4,000 crore) on December-end 2021 as the bidders wanted to buy these papers at a higher yield (or lower price) amid rising yields in the secondary debt market.

But the central bank, as debt manager to the government, would have none of it. It is trying to keep G-Sec yields on a leash so that Government can raise resources at a reasonable cost.

Since the central bank did not devolve the aforementioned auctions on PDs, the 10-year benchmark G-Sec saw a mild 11 paise rally on December 31, 2021, to close at ₹97.51 over the previous close, with its yield declining about two basis to 6.4537 per cent.

If the RBI had devolved the two papers on PDs, the total depreciation on the 10-year G-Sec in Q3 would have widened to about ₹2.26, assuming yield on this paper went up to 6.55 per cent, needing increased investment depreciation provision.

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