InvestorQ : What does it mean when the bonds devolve on the RBI and why did that happen on 27 August?
Juvina Maggie made post

What does it mean when the bonds devolve on the RBI and why did that happen on 27 August?

Deepa Salunkhe answered.
2 years ago

Devolvement of bonds means that the RBI could not find any buyers or was unwilling to sell at the high yields demanded by the banks. On Friday, RBI refused to pay the high returns demanded by investors in Friday’s auction, resulting in buyers staying away from the Rs.18,000 crore bond sale.

Please not that the issue of bonds by the RBI no longer devolve on the RBI automatically as used to be the case till 1997. When the bonds devolve on the RBI it is tantamount to monetizing the deficit which could be inflationary for the economy due to a spurt in money supply.

Government had planned to sell the 10-year bonds maturing in 2030 at a coupon rate of 5.77% and bearing a cut-off yield of 6.1448%. This was lower than the Bloomberg consensus estimates. Earlier on 14 August also, Rs.4650 crore of bonds remained unsold.

RBI was not comfortable with current yields. On 26 August, RBI had conducted Operation Twist at 6.15% and if RBI had agreed to sell the paper at 6.22%, it would have resulted to a spurt in yields. This only means that the RBI will have to be more aggressive in OMOs.

It must be remembered that in the last one month since the monetary policy was announced, the bond yields on the 10-year benchmark have gone up by 36 bps after the policy held status quo on rates and hinted that further rates were ruled out this year.

Normally, the central bank conducts OMO or open market operations by selling to drain liquidity in the financial system and buying to infuse liquidity. It looks like now the RBI may have to do a lot more of that.