In a policy reversal, the Reserve Bank of India (RBI) has announced the auction of fresh government paper before the announcement of the results of a prior auction to prevent speculation in the market. There was always a time lag between the time when a new paper was eligible for trading and the announcement of a fresh auction.
RBI announced the auction of eight-year paper scheduled for April 25 on March 30, the day of the auction of the five-year paper. Since the market was aware that an auction of 8-year paper was round the corner, the 11.10 per cent 2003 paper did not command a premium when it opened for trading. The paper was dealt at Rs 99.80-100.20.
At the wholesale debt market segment of the National Stock Exchange this paper was dealt at a weighted average yield of 11.09 per cent.
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This has ensured that the volatility in the secondary market prices during the time lag between an auction of a government paper and announcement of a fresh auction has been curbed, says a primary dealer.
In the past, following an auction the new paper was invariably traded at a hefty premium. Following the announcement of a new auction, the price of this paper generally crashed thereby causing volatility in the market. This happened in the last financial year as the secondary market price movements would reveal following the auction of 10-year paper on April 10 which was followed by the state loans and then the auction of five-year paper on May 9.
Close on the heels of announcement of auction of 8-year central government paper, RBI announced the sale of 12.15 per cent 2008, state government loans for raising Rs 3,000 crore.
This would ensure that market players bid realistically at the auction of 8-year paper on April 15 aware that subscription to state government paper commences on April 20.
It has been noticed in the past that the bids tendered by the banks at the auctions is influenced by the short term liquidity position.
This leads to frequent intra year shots in the yield curve and has hindered the emergence of a smooth yield curve.
Announcing the auctions well in advance could ensure that the bids tendered at the auctions are not excessively influenced by the short term liquidity position in the money markets and banks would take a longer perspective.
Market watchers state that the decision by RBI to announce auction well in advance is a refreshing change.
However it is too pre-mature to construe this development as the beginning of an era when the time schedule of governments borrowing would be announced at the beginning of the financial year.