India bonds weaken further as auction disappoints again

The Reserve Bank of India could not sell the entire amount of bonds on auction to bidders for a third straight week on Friday, underscoring a persistent bearish sentiment in the local bond market. The central bank could sell only 2.55 billion rupees ($38.13 million) of the 6.65 percent 2020 bond out of the 20 billion on offer to bidders.

The remaining 17.45 billion rupees of paper had to be bought by primary dealers, the underwriters of local bond auctions.That pushed bond yields higher with the 10-year government bond yield inching up to 7.75 percent from 7.74 percent before the auction result was announced. It had ended at 7.73 percent on Thursday.

"It was a 2-year bond and still there was no demand, that shows how bad the condition of the market is," said a dealer at a foreign bank.

The RBI has taken series of steps to provide comfort to the Indian bond market including removing restrictions on foreign investors from buying only mid- to long-term tenures. Last month, it had also raised the debt foreign investment limit marginally.

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However, none of these measures have helped to calm jittery nerves as state banks, the largest segment of investors, stayed away on concerns of potential RBI rate hikes in months ahead. 

Last week the RBI managed to sell only 250 million rupees of the 30 billion on offer for 7.37 percent 2023 bond into the market. 

The rest of the 29.57 billion rupees had to be taken up by the primary dealers. A week prior, a smaller auction met with a similar fate. 
($1 = 66.8850 Indian rupees)