"In five of the six auctions for 10-year government bonds this quarter, the debt papers which were offered remained unsold," Times of India (TOI). The government borrows money from the market by selling bonds, Investopedia, to finance spending in excess of its revenues from taxes and seigniorage, Investopedia. Instead of printing notes to finance its deficit the government borrows from the market through the Reserve Bank of India (RBI) which invites bids for bonds and sells to the highest bidder. If bids are less than the cut-off price set by the RBI it may choose to withdraw the bonds offer, when the auction is said to devolve to the underwriters, Economic Times (ET). "In only one of the six auctions, the government opted for a green shoe option and mopped up nearly Rs 2900 crore (Rs 29 billion) extra, in addition to the planned Rs 14,000 crore (Rs 140 billion) announced by the RBI, the data from the central bank showed." In the green shoe option the underwriters could have received higher commission or extra bonds to make up for lack of demand, Investopedia. "Of the five auctions, each of Rs 14,000-crore, three were cancelled and two partially devolved on the bond houses." "The low interest among bond dealers for 10-year bonds, usually the most liquid among gilts across tenures, indicate that in future the government may have to pay higher rates to mobilise funds from the market." Finance Minister Nirmala Sitharaman predicted that the government would need to borrow Rs 12 trillion in 2021-22, in this year's budget, presented in February, The Print. Which is why the RBI is tying itself in knots to keep yields below 6% so as to keep a lid on government interest payments in the future. Yields of 10-year bonds are at 6.028%, investing.com. For some reason, the RBI Governor Shaktikanta Das believes that market repression due to forcibly suppressed yields are a "public good". "We look forward to cooperative solutions for the borrowing programme for the second half of the year," he warned in October last year, Aparna Iyer. "Bond investors were not pleased because they believe that amid rising inflation and economic uncertainty, the government should pay higher," Mint. High inflation means that the purchasing power of the rupee is going down, which means in 10 years the value of money invested in bonds would be much lower than today, so dealers want a higher interest rate to compensate for the loss in value. Comparing with the dollar gives a picture of how the rupee has been devaluing. In 2007-08, one dollar bought about Rs 40, wikipedia. Since 2008, the US has averaged inflation at around 2% in the 13 years to 2021, Inflation Data, while inflation averaged at around 7-8% in India in the 13 years from 2008 to 2021, inflation.eu. At 7% average inflation the rupee should be trading at 76 to the dollar today, and at 8% average rate of inflation the exchange rate should be 86 rupees to one dollar. The exchange rate of the dollar is just a tad over Rs 74 today, xe.com. The positives for the rupee are the foreign exchange reserves in excess of $600 billion, TOI, and huge investments into our stock markets by foreign portfolio investors (FPI), pib.gov.in, while the negatives are high inflation in India and the RBI's loose monetary policy of increasing liquidity and low interest rates to help the government. "Taking all these factors into account, one can foresee the rupee moving in the range of Rs 74-75 to the dollar, unless there's a shock of some sort, though none looks likely at present," wrote Madan Sabnavis. That "unlikely" shock would be a rise in interest rate in the US where some members of the Federal Reserve foresee interest rate hikes next year to calm inflation, CNBC. "Higher rates in the US could hit Indian stocks badly, weaken the rupee and raise the landed price of crude oil," wrote Shettigar and Misra. The RBI can repress Indians but the Fed is much more powerful. It has its head stuck firmly in the sand. What will it do when the sand runs out?
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