RBI accepts Rs.2,532-crore worth bids in Rs.12,000-crore sale

The Reserve Bank of India’s effort to support the rupee by sucking liquidity from the market through a Rs12,000-crore ($2 billion) bond sale fell short on Thursday as it accepted just over one-fifth of the bids, adding pressure on it to find other ways to mop up rupees.

The open market operation was part of the RBI’s three-pronged plan unveiled on Monday to prop up a rupee that had lost about 10 per cent against the dollar since the start of May.

But the other steps, including hiking short-term rates by 200 basis points, sent bond yields surging, creating a mismatch in pricing demands.

In Thursday’s open market operation (OMO), the RBI accepted bids for just Rs.2,532 crore ($424.8 million).

“This does complicate the RBI’s task of managing the rupee through the liquidity channel,’’ said Rohit Arora, emerging market rate strategist at Barclays Capital in Singapore.

“We expect it to continue doing more OMO sales in the near-term. The other option to stabilise the rupee for the government is to issue an offshore bond,’’ he said.

Whatever measures the central bank takes are liable to be little more than short-term fixes, as the rupee’s weakness stems from a record high current account deficit.

The currency’s vulnerability was laid bare by the sea-change in global capital flows following speculation that the U.S. Federal Reserve would begin to wind down its money-printing stimulus programme later this year, which convinced investors to pull money out of riskier assets.

While trying to conserve its currency reserves, equivalent to just seven months of imports, the RBI has sought to limit avenues for speculation against the currency, to buy time for the Prime Minister Manmohan Singh’s government to come up with measures to reduce the external deficits.

A relaxation of rules for foreign direct investment announced on Tuesday for several sectors, including telecommmunications, failed to give big boost to sentiment.

Besides further OMOs, the RBI could try to pressure the Centre to bite the bullet and accept less-favourable pricing at its bond sales to drain liquidity. The next such sale is due on Friday. On Wednesday, the RBI rejected all bids in a $2-billion treasury bill auction on the government’s behalf.

Sovereign bond issue

The government is also contemplating a sovereign bond issue to attract inflows and prop up the rupee. An increase in the RBI’s policy repo rate at its July 30 review, once unthinkable, has also become an outside prospect, as has an increase in the cash reserve ratio for banks.

“The RBI’s rejection of bids at the OMO and the treasury bill auction suggests it does not want yields to rise too much, but only wants to drain liquidity. The only option before it now looks like an at least 50 basis point CRR hike on July 30,’’ said Baljinder Singh, a bond dealer with Andhra Bank.

Government bond yields eased on Thursday after the RBI’s bond sale, with the benchmark 10-year bond yield dropping six basis points on the day to 7.99 per cent. Yields are still up 44 basis points from before Monday night’s measures.

The hike in short-term interest has virtually shut the market in commercial bonds and short-term bonds used through which companies and banks raise short-term funds. — Reuters