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India’s bonds reflect nothing but the RBI’s desires. It’s a common concept of finance, that the bond yields act as a gauge of the balance between growth and inflation by showing where interest rates should be. However, this concept is for normal times, whereas in the case of India this gauge is broken. And the bond yields, especially the benchmark 10-year, reflect nothing beyond the desires of the central bank.


The benchmark 10-year bond has been stuck at around 6% for more than a year despite the actual situation of the economy. The bond is not reflecting the reality of a pandemic triggering a recession and the subsequent economical recovery. The recent surge in inflation and the mammoth borrowing by the government is not really impacting the bond yield. As it all has whittled away under the relentless grip of the Reserve Bank of India’s (RBI) incessant bond purchases.

How the 10-year benchmark is far away from the economic reality of the country?

While the central bank could not take the supply off a fatigued market, it is resorting to talking down the yields. Even the way the auctions are conducted has also changed last week. Auctions for the tenures of two, three, five, ten, and 14-year will now be based on uniform pricing instead of multiple pricing methods. Meanwhile, there is no halt in bond purchases.


On Monday the RBI come up with an announcement that it will buy Rs20,000 crore worth of bonds under its G-SAP 2.0. G-SAP 2.0 is a government security acquisition program. The central bank’s balance sheet support was very crucial in FY21. With the given size of the government’s borrowing and the relative fatigue in the bond market. The borrowing had been very expensive if the central bank had not come up with an approximation of Rs3.2 trillion bond purchase. Because, in that case, the yields could have experienced a high surge in their value.

However, also the flipside of a deep central bank intervention can not be ignored. A distorted yield curve is only one of its respective consequences. Trading volumes have dropped significantly, making the market thin and susceptible to higher volatility. The 10-year benchmark bond has only a fraction of its stock available for trading. A large part of the outstanding stock is sitting on the RBI’s balance sheet. Therefore, it is easy to understand that the yield is hardly reflecting the economic realities.

It is clear, that the focus of RBI has been the 10-year benchmark yield. Under the G-SAP, two-fifth of the total Rs 1 trillion bought by the RBI has been of the 10-year bond.

What does the market think about it?

According to an anonymous bond trader, It is futile to look at the 10-year as the yield doesn’t reflect anything. But we can see the trends in the 5-year and 15-year bonds. They clearly show that inflationary concerns have taken hold. The 5-year bond yield has risen by 20 basis points in the past month after the surge in retail inflation in May, which is beyond 6%.

However, many analysts believe that yields will now inch up steadily to reflect the expected unwinding of the RBI’s policy accommodation. Even so, it would take a long time before the ten-year yield becomes more relevant to the market realities.

For more such updates, keep watching this space!

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