The first-ever auction of a government paper with a call-and-put option tomorrow will be mopped up but the other long-tenor paper may face partial devolvement. The Reserve Bank of India is auctioning Rs 3,000 crore of 10-year paper with put-and-call option after five years and Rs 4,000 crore of 15-year paper at 8.07 per cent.
Money market dealers expect the cut-off yield for the 10-year paper to be around 6.70 per cent, while in case of the 15-year paper, the cut-off yield is expected to be around 7.80-7.85 per cent.
As the 10-year paper is having a put-and-call option after five years, market participants are considering it as a 5-year paper. In the secondary market, the 5-year paper was traded around 6.75 per cent, while the yield of 15-year paper was in a range of 7.80 per cent to 7.85 per cent.
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With this twin auction, 49.7 per cent of the gross government borrowing programme of Rs 1,42,779 crore for fiscal 2003. This is the first auction out of the Reserve Bank of India's indicative calendar.
Money market dealers said that liquidity is good and the market has interest for a paper with 5-year maturity. However, there is no interest for long-term papers such as 15 years. Moreover, the paper is considered illiquid.
A dealer with a private bank said, "We feel that no bank is thinking of investing in a very long term paper right now. Moreover, generally insurance companies are the subscribers to the papers with maturity 15 years and more. But they also seem to have no appetite."
The government securities market, however, is looking at the auction as the cut-off yield will signal the Reserve Bank of India's view on the current market yield and the market prices will move accordingly.