RBI cuts auction size by Rs 3000 crore

The Reserve Bank of India (RBI) today slashed the size of the government bond auction scheduled to be held on July 11.

A central bank notification said the government bond auction will be for an amount of Rs 7,000 crore, down from Rs 10,000 crore, according to the scheduled government borrowing programme.

The RBI had last month increased the auction size by Rs 4,000 to Rs 9,000 crore to suck out part of the excess liquidity from the banking system, following which bond prices fell sharply. The government then said it had only advanced a part of the borrowing programme.

Dealers said the amount had been brought down as the RBI had enhanced the size of the government borrowing programme earlier. It did not want to disturb the entire calendar and, thus, adjusted the size in this auction.

The market remained lacklustre with the yield on the 10-year government bond at 8.16 per cent.

For the auction, the government will re-issue 10-year paper 7.59 per cent government stock 2016 for a notified amount of Rs 5,000 crore and 7.50 per cent government stock 2034 for Rs 2,000 crore. The market is expecting the cut-off yield on the 10-year paper to be around 8.20 per cent at the auction.

"The market would have welcome a floating rate bond at this juncture, but the RBI does not seem to be receptive to the idea. The last floating rate bond was issued about two years back. In a rising interest rate scenario, floating rate bond is an ideal instrument," said a bond dealer.

The market could not react to today's development, as it happened after market hours. Bond dealers said the reduction in the auction size would not trigger any rally in the market, and the yield on the 10-year benchmark paper would remain in the 8.15-8.20 per cent range till July 25 when the RBI would announce the quarterly review of its monetary policy.