The Reserve Bank of India has mopped up about 70 per cent of the benchmark 10-year Government Security (coupon rate: 5.85 per cent) the government has issued since December 1, 2020, thereby keeping G-Sec yields under check and ensuring that banks have enough liquidity to subscribe at the weekly bond auctions.

The current outstanding in the 10-year benchmark G-Sec is ₹1.05-lakh crore. Of this, around 70 per cent is with the RBI. The central bank has accumulated all this via open market operation (purchases), the G-Sec Acquisition Programme and via the secondary market. What this means is the RBI is providing liquidity to banks to encourage them to buy G-Secs at the weekly auctions.

Marzban Irani, CIO-Fixed Income, LIC Mutual Fund, said: “Due to the Covid-19 related uncertainty, central banks all over the world have intervened in the financial markets. Similarly, the RBI is supporting the huge domestic borrowing. However, once the new 10-year benchmark is issued, the current one will become illiquid due to lower float in the market.”

Irani opined that if the RBI had not intervened, the yield on the current 10-year G-Sec, which closed at 6.0227 per cent on Monday, would have been much higher.

He estimated the coupon rate of the new 10-year benchmark G-Sec, which is likely to be issued by the government either this week or next, to be in the 5.95 to 6.05 per cent band. Ever since the 5.85 per cent G-Sec 2030 was issued in December 2020, it is among the top three traded G-Secs.

Bond market expert K Boovendran observed that at the appropriate time, the RBI will offload the 10-year G-Sec to the banks. “The RBI will not hold them permanently. It is only because of the peculiar situation (triggered by the pandemic) that it Is holding so much of this paper.

“… The RBI is very actively operating in the G-Sec market. That is why the G-Sec yield has been kept under check,” he said.

Boovendran, however, noted that since the paper is not available in the market, there could be more demand for it from market participants. More demand will translate into higher price and lower yield for the paper. Bond yield and price are inversely related and move in opposite directions.

He said that whenever the RBI feels that banks have enough money to subscribe to G-Sec auctions on their own, it will sell the 10-year G-Sec from its portfolio.

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