 "Bond auction: RBI goes for uniform price method to curb volatility")
In a bid to curb volatility in the bond market, the Reserve Bank of India (RBI) has decided to adopt the uniform price method for the bond auction on Friday.
The move comes after the massive pull out of foreign institutional investors (FIIs) from the debt market has impacted the rupee and bond yields.
According to market players, the uniform price auction of bidding, instead of the multiple price auction, would arrest a significant rise in bond yields.
Under the uniform price auction method, all successful bidders are required to pay for the allotted quantity of government securities at the same rate, which is the auction cut-off rate. This would be irrespective of the rate quoted by them. Under the multiple price auction method, successful bidders are required to pay for the allotted quantity of government securities at the respective rate at which they had bid.
FIIs have so far pulled out over $3 billion in June from the domestic debt market. The sell-off resulted in yields climbing up, besides weakening the rupee. FIIs sold Indian debt on expectations that the US Federal Reserve would soon pull back the third-round of quantitative easing (QE3) due to which US Treasury yields will become more attractive.
Yields would also come under pressure due to the high government borrowing programme and RBI’s hawkish monetary policy stance.
The government plans to borrow Rs 3.49 lakh crore in the first half (April-September) of this financial year, compared to Rs 3.7 lakh crore in the first half of the previous financial year.
On Friday, RBI is to auction four government securities — the new 10-year benchmark bond 7.16 per cent 2023 worth Rs 6,000 crore; 7.28 per cent 2019 bond worth Rs 3,000 crore; 8.97 per cent 2030 worth Rs 3,000 crore and 8.83 per cent 2041 worth Rs 3,000 crore.
As it is a price-based auction, bidders will give their quotes in terms of price. Successful bidders are those who bid at the cut-off price or higher than the cut-off.
“Due to the announcement of this, we are not going to see a big spike in yields on the new 10-year benchmark. If the uniform price auction was not there and the rupee closer to Rs 59 per dollar, the new benchmark could have easily touched 7.40 per cent,” said Arun Srinivasan, senior vice-president (investments) at ICICI Prudential Life Insurance. At least till September, he said, the central bank might continue with the uniform price auction method as there are 12 weeks of continuous supply of government bonds.
The bond was auctioned on May 17 and at that time, the yield was at 7.16 per cent.
Since the start of June, the rupee has weakened by 3.91 per cent and ended at Rs 58.72 a dollar on Wednesday, compared to the previous close of Rs 58.77.
“The yield on the 7.16 per cent 2023 paper will be around 7.25 range with uniform price auction being discussed, plus minus 5 basis points. However, if the rupee weakens further against the dollar, it would go up to 7.40 per cent,” said Nirakar Pradhan, chief investment officer at Future Generali India Life Insurance.
The move comes after the massive pull out of foreign institutional investors (FIIs) from the debt market has impacted the rupee and bond yields.
According to market players, the uniform price auction of bidding, instead of the multiple price auction, would arrest a significant rise in bond yields.
Under the uniform price auction method, all successful bidders are required to pay for the allotted quantity of government securities at the same rate, which is the auction cut-off rate. This would be irrespective of the rate quoted by them. Under the multiple price auction method, successful bidders are required to pay for the allotted quantity of government securities at the respective rate at which they had bid.
FIIs have so far pulled out over $3 billion in June from the domestic debt market. The sell-off resulted in yields climbing up, besides weakening the rupee. FIIs sold Indian debt on expectations that the US Federal Reserve would soon pull back the third-round of quantitative easing (QE3) due to which US Treasury yields will become more attractive.
Yields would also come under pressure due to the high government borrowing programme and RBI’s hawkish monetary policy stance.
The government plans to borrow Rs 3.49 lakh crore in the first half (April-September) of this financial year, compared to Rs 3.7 lakh crore in the first half of the previous financial year.
On Friday, RBI is to auction four government securities — the new 10-year benchmark bond 7.16 per cent 2023 worth Rs 6,000 crore; 7.28 per cent 2019 bond worth Rs 3,000 crore; 8.97 per cent 2030 worth Rs 3,000 crore and 8.83 per cent 2041 worth Rs 3,000 crore.
As it is a price-based auction, bidders will give their quotes in terms of price. Successful bidders are those who bid at the cut-off price or higher than the cut-off.
“Due to the announcement of this, we are not going to see a big spike in yields on the new 10-year benchmark. If the uniform price auction was not there and the rupee closer to Rs 59 per dollar, the new benchmark could have easily touched 7.40 per cent,” said Arun Srinivasan, senior vice-president (investments) at ICICI Prudential Life Insurance. At least till September, he said, the central bank might continue with the uniform price auction method as there are 12 weeks of continuous supply of government bonds.
The bond was auctioned on May 17 and at that time, the yield was at 7.16 per cent.
Since the start of June, the rupee has weakened by 3.91 per cent and ended at Rs 58.72 a dollar on Wednesday, compared to the previous close of Rs 58.77.
“The yield on the 7.16 per cent 2023 paper will be around 7.25 range with uniform price auction being discussed, plus minus 5 basis points. However, if the rupee weakens further against the dollar, it would go up to 7.40 per cent,” said Nirakar Pradhan, chief investment officer at Future Generali India Life Insurance.