How To Undermine the Public Auction of Public Debt, the RBI Way
Rajendra H Gill 07 August 2021
The Reserve Bank of India (RBI) has done it again.
The public auction, yesterday, of the new benchmark 10-year GSec (6.10% GS2031) witnessed decent investor participation with a bid-cover ratio of 1.60. However, RBI rejected ALL bonafide bids for Rs14,000 crore on offer for this security.
The intent is very clear. To stubbornly refuse the public market demand for a reasonable rate of return. This has been the pattern of irresponsible behaviour of RBI, acting as the merchant banker and principal broker for the largest borrower from the public debt markets, the government of India (GoI).
Irresponsible behaviour characterised by ad-hoc and arbitrary cancellation of auctions, heavy devolvement on primary dealers, who do first-line intermediation between the primary and the secondary market for sovereign debt.
RBI’s role as principal debt manager is clearly in conflict with its primary role as an inflation targeting central bank tasked with the core responsibility of setting interest rates in line with inflation.
Setting interest rates in a manner that reflects an ever-present need to delicately balance the interests of the borrowers and the suppliers of savings.
Why the blatant partisanship against the provider of funds, the savers, the investors in public debt?
On account of the misplaced belief that growth, revival of the economy, can be enabled by a sharp reduction in interest rates, which benefit borrowers, and incentivise them to borrow and spend, be it for investment or for consumption.
The evidence, across the globe, is very much mixed, suggesting that sharp reductions in interest rates as a lever to push lending have limited efficacy. Therefore, the oft repeated cliche which captures the limitations of monetary policy, 'you can lead a horse to water but cannot make it drink'.
Notwithstanding this RBI Governor keeps regurgitating the same tired expression, "the orderly evolution of the yield curve as a public good."
Translated into simple language the Governor is saying that I decree that the rate of interest will not be a market-determined rate, but a rate determined by the governor. Not a reasonable rate of interest determined in a cleanly administered public auction of debt in the public market. But an ad-hoc, arbitrary rate determined by the bureaucrats of the RBI.
Public interest is what benefits the largest borrower the most. Therefore, the singular resolve to reduce the cost of borrowing for this borrower.
RBI gets away with this arbitrary undermining of a very fine institutionalized process for the auction of public debt because it can talk about Growth. About how it is singularly focused on pulling India out of the quagmire caused by the pandemic.
RBI, drowning in its own hubric fails to recognize that growth revival is not its principal KRA (key result area). This is the job of the elected government who has the mandate to govern. And the principal instrument available to the government is fiscal policy. Decisions on spending, raising revenues to support spending, all of which directly influence and impact the economy and facilitate economic revival. All fall in the area of fiscal policy.
RBI is accountable to the citizens of this country who need to know why it is diligently demolishing brick-by-brick a robust institutional structure called the public auction of domestic debt which has faithfully supported and continues to support the ever-growing need of not only the sovereign borrowers, the union and the states of this republic but all class of borrowers whose borrowing cost is determined in relation to the sovereign borrowing cost.
RBI gets away with such brazen behavior because unlike the equity capital market, the debt capital market and its functioning and the process by which interest rates are determined by this market are not easily understood by the informed citizenry and public intellectuals.
It is imperative to question and submit to forensic audit RBI's action in the matters of monetary policy and its ever-present conflict of interest as a merchant banker-cum-debt broker to the government of India.
The table below, RBI’s press release, gives the results of the auction today.
The reader needs to look at the information regarding the new 10 Yr. benchmark security 6.10% GS2021. All bids for this security have been rejected.
Why? Because, in its wisdom, RBI has determined that the reasonable rate of interest sought by the bidders will entail a dis-orderly evolution of the yield curve.
(Rajendra H. Gill, an ex. TAS (Tata Administrative Services) officer is now a whole-time director with VMS Consultants Pvt Ltd an expertise-based design consulting practice. Mr. Gill has worked in the financial markets for more than two decades.)
2 years ago
The Author must realize that this is one in 100 years pandemic and extraordinary times require extraordinary measures. We had a 7.4% Contraction in FY 21. Growth revival assumes paramount importance. Soft interest rate is sin qua non for revival of Growth. The Corporate Funding Rate is directly related to risk free Sovereign Funding Cost. 10years Benchmark is the most tracked worldwide. Ordinarily the RBI should have monetized the Deficit by privately taking the debt on its books.Howeever it is choosing the jawboning and indirect route through a mixed of Gsap& Operation Twist. The extent of Borrowing is humongous 13trn against normal Year of 6.5 to 7trn. RBI in its wisdom is well within its rights to manage the Sovereign Borrowing at cost effective manner as the Debt to GDP ratio of 90% of GDP requires debt cost to sustain the insipid Growth rate. FPIs are playing traunt and Sovereign Dollar Borrowing is frowned upon. Should the RBI simply be a mute witness to the bear cartel who indulge in rampant short selling .
2 years ago
Well said. The RBI's conflict of interest as a manager of the GOI's borrowing and as the monetary policy authority is blatant and has been oft commented upon. yet the cosy relationship continues with the RBI de facto captured by the central government, as have all the regulators (apparently only IAS officials have the multiple specialised skills to regulate banking, insurance, securities markets, telecom and everything else).
2 years ago
Ordinary citizens will understand your views. Academicians should take up this issue and write to the President of India.
2 years ago
Well said ! RBI and the geniuses there should, if at all decide to be bothered about governance should move beyond just tinkering with interest rates and as regulators of commercial banks discuss and come up with instruments for alleviating financial burden on those affected by this pandemic. The discussion concerning what’s usually called as “low finance” is glaring.

We seem to have internalized that we are a developed and rich state !
Replied to sharmaorajesh comment 2 years ago
The absence* of discussion on what’s usually described as “low finance “ is glaring !
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