The Reserve Bank of India’s strategy to drive bond yields down will face another stern test on Friday when it auctions government securities worth Rs 32,000 crore. The central bank will be auctioning bonds with maturity tenures ranging from 5 years to 45 years.

The RBI has been fighting a losing battle against so-called bond vigilantes who have a vested interest in keeping bond yields high.

Last Friday, the RBI refused to accept any bid at the auction of the benchmark 10-year paper as market participants demanded higher yields.

With the government set to borrow over Rs 12 lakh crore in the current fiscal, the central bank has been looking to cool runaway yields to ensure that the Centre can continue to borrow at very cheap rates.

In his April 7 monetary policy statement, governor Shaktikanta Das had said that in the fiscal ended March 31, the RBI had completed a Rs 22-lakh-crore borrowing programme for the Centre and the states at record low rates.

Bond yields have risen sharply since the middle of February and threaten to scupper the plan to help the government to continue to borrow at low rates like last year.

The RBI also released minutes of its monetary policy committee (MPC) where the developments in bonds markets also came up for discussion. Here, MPC member Ashima Goyal said the spread of the 10-year government security over short rates was 60 basis points during 2011-17 before rising sharply in 2018 and this has increased to over 200 basis points. This has come despite large open market operations.

“The markets are caught in an irrational trap,” she said. “They did not respond to positives such as better tax revenues. Bond markets are subject to disruption where they expect rates to rise and do not buy; so, when the rates rise, debt becomes unsustainable and fears are self-fulfilling.”