The twin-auction of Rs 7,000 crore, to be conducted today, is likely to receive mixed response due to deterioration of the liquidity condition in the market.
Dealers are expecting the Rs 2,000 crore of 25-year paper to go through successfully. However, they feel that the Rs 5,000 crore of 11-year paper will be undersubscribed.
With these two auctions, the Reserve Bank of India will be completing more than 70 per cent of the gross government borrowing programme of Rs 1,19,770 crore.
A primary dealer said, "The 11-year paper is likely to be undersubsribed because of its huge notified amount. Both the banks and the primary dealers are likely to face liquidity strain because of probable outflow through open-market window during the week. Hence, they will not be interested in putting too much funds in the auction."
He said there was a possible open-market sale of the security as the RBI will mop up liquidity to prevent the decline of spot rupee.
Dealers said insurance companies were generally the buyers of long-term securities and since the Life Insurance Corporation was flooded with funds, 25-year paper would get a good response.
A dealer with a nationalised bank said, "We are expecting oversubscription in case of the 25-year paper."
Dealers, however, could not give their judgement on the probable cut-off yields of both the securities.
A dealer said, "It all depends on how the spot rupee moves against the dollar on Monday and how the government securities market reacts to it. But, in any case, the cut-off yield for the 11-year paper will be 3-5 basis point higher than the secondary-market yield."
And the cut-off yield of the 25-year paper will set the benchmark as there is no such long-term security currently available in the market.
