Shaky RBI ups 5-yr gilt auction commission

In order to ensure smooth sailing of government borrowing papers at the auction tomorrow, the Reserve Bank of India (RBI) has approved higher underwriting fee for primary dealers.

Primary dealers underwrite the government auctions, thereby giving a commitment to the central bank that if the paper is not fully subscribed, they will pick them up. For this, a commission is given, which usually ranges from 1-2 paise.

Market players feel that the fee of 4 paise for the floating rate bond and 2 paise for 2009 paper with a maturity as short as 5 years reflects the RBI's concern.

Dealers added that the concern in genuine as the bankers are too busy avoiding a depreciaiton loss in their existing books and therefore adding to more to the portfolio is shaky.

On the other hand, the RBI has rejected commision bids for the long-term 2022 paper.

According to observers, while the RBI is comfortable with higher interest rate for the long term of the maturity, in the short term, it does not want to signal a higher rate, said a banker.

Therefore, dealers feel that the long-term 2022 paper will be cleared at a higher cut-off yield of around 7.25 per cent. The central bank is said to be confident that it will picked up by insurance majors.

On the other hand, dealers said the five-year paper, even if bid at a higher rate of interest rate, will cleear with cut-off yield of 5.90-95 per cent.