The first floating rate government paper auction to be conducted tomorrow by the Reserve Bank of India (RBI) is slated to receive more than 100 per cent oversubscription.
The paper has a five-year maturity with Rs 2,000 crore of notified amount. Money market dealers expect the cut-off yield for the paper to be 8-15 basis points higher than its base rate of 7.06 per cent. The yield of the paper closed at 7.15 per cent today, little changed from yesterday's level.
The RBI announced a 0.50 paise underwriting commission payable to primary dealers for the auction.
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Dealers said the paper was good for investment, but not for trading. "The paper's coupon will be reset after every six months and it will make the pricing difficult. However, it will be a good short-term investment, as it will provide hedge against interest rate risk," a primary dealer said.
The short end of the market, which is relatively stable compared with the longer and medium end, may rally after the auction. "There is hardly any secondary market trading at the short end. The auction cut-off will give an indication of what should be the yield for the five-year paper and can encourage trading at the one to five year maturity," the treasury head of a private sector bank said.
The base rate of the paper will be reset after every six months and will be calculated as the weighted average of the cut-off yield in the last five 364-day treasury bill auction. If the 364-day treasury bill is discontinued, the applicable variable base rate will be the average yield to maturity (YTM) on the one-year government paper as on last six reporting Fridays.
The YTM will be calculated in consultation with the Fixed Income Money Market and Derivatives Association of India.