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Fixed Income

Massive Devolvement Forces RBI To Cut Bond Issuance

In what is definitely a temporary move, the RBI has cut the issuance of government bonds this Friday to just 10,000 cr. , down from the 15,000 cr. that was mentioned in the calendar. This is largely because recent bond auctions have been devolving BIG TIME, and hardly anyone is noticing.

Recently Devolved Auctions

The tiny figure on 27 Aug was the Inflation Indexed bond auction of 1,000 cr. of which 53% devolved even at a yield of 3.47%. I.E. You could get 3.47% more than inflation and yet, no takers. I will write about that separately.

This is fairly huge. In the last 45 days,

And this devolvement is despite the RBI buying bonds on many such days! RBI bought 6300 (of 8000 intended) on 30 August and 23 August (each). These were bonds of different securities than those sold by the government – a direct buy of the same pieces would be construed as printing money to fund government.

Why do I say the cut in bond issuance size is temporary? It’s not that the government will borrow any lesser. The cut is only to remove the stress on bond primary dealers who have to buy when no-one else does (the concept of devolvement). How will the government finances pan out? Remember, they are issuing 22,000 cr. of cash management bills every week, and that provides a buffer; but this is temporary as cash management bills have to be repaid in the short term (typically 35-48 days). So the reprieve from bond issuance will only last a couple months – in fact it’s quite likely that in the last quarter of the year, they actually INCREASE the bond issuance to make up for a bigger fiscal deficit.

Effectively, in the 2013-14 year, we have become the biggest auction devolvement year in absolute terms, and it’s just September. Seven months to go.

Devolved Auctions by Fin Year