The non-competitive bidding facility, introduced by the Reserve Bank of India (RBI) in January this year for auction of government securities has met with poor response from individuals, Hindu Undivided Families, firms, provident funds, trusts, etc.
Lack of understanding of the government securities market, absence of exit options and relatively higher interest rates offered by banks on term deposits are the main reasons for the tepid response from retail investors.
Though the central bank has reserved up to five per cent of the notified amount in a gilt auction for the non-competitive bidding (NCB) category of investors in a bid to encourage wider participation and retail holding of Government securities, the investor response has been almost negligible.
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A case in point is the twin auction held on July 17. In the case of auction of the 10 year paper, the RBI received a meagre 12 bids aggregating Rs 12.484 crore under the NCB category as against the notified amount of Rs 3,000 crore.
NCB as a percentage of the notified auction amount for this paper works out to only 0.41 per cent as against the five per cent reservation.
In the case of auction of the 8.07 per cent 2017 paper for a notified amount of Rs 4,000 crore, the RBI received 23 bids aggregating Rs 37.311 crore under the NCB category. NCB as a percentage of the notified amount for this paper works out only 0.932 per cent.
"The cut-off yield on the 10 year paper (which effectively is a five year paper on account of the put & call option) that was auctioned on July 17 was 6.72 per cent. As against this a three-year deposit offers higher interest of around 8 per cent per annum. Therefore, the term deposits are more lucrative for retail investors," said a senior official with a public sector bank.
Further, retail investors, who have picked up government securities from the primary market, have no exit option as the minimum lot size in the gilts market is Rs 5 crore.
"A couple of primary dealers (PDs) are offering two way quotes in the market but the investor ends up taking a hit as the market players invariably bid (buy) for the gilts at lower than the market price," averred another dealer.
The RBI should either become a market-maker for the gilts held by retail investors by opening a window or allow short-selling in paper by banks and PDs so that they in turn can offer two-way quotes or allow banks to offer loans against the securities to make the securities market attractive for the investors, suggested the dealer.