Uncertainty over auction ahead of policy review

The Reserve Bank of India (RBI) and the government are engaged in hectic parleys on whether to go ahead with the next auction of government bonds, which coincides with the central bank's quarterly review of monetary policy.

A Rs 5,000 crore auction of 15-19 year government paper has been scheduled between July 17 and July 25 and the policy review is slated for July 25.

According to banking sources, since the interest rates have already hardened factoring in a possible 25 basis points reverse repo rate hike in the review, the RBI is weighing various options.

"The government may either cancel the auction or have it after the monetary policy review. This is to avoid giving any interest rate signals on the eve of the quarterly review of the monetary policy," said a source. In this case, the auction could be announced around July 25 and conducted later.

The RBI yesterday accepted only 20 bids worth Rs 1,590 crore for the 10-year 7.59 per cent paper. It had received 159 bids worth Rs 7,571 crore as against a notified amount of Rs 5,000 crore.

Similarly, in the long term 7.50 per cent 2034 paper, only 15 bids were accepted for Rs 104 crore even as it attracted 64 bids for Rs 4,085 crore as against a notified amount of Rs 2,000 crore.

RBI's decision to let the Rs 7,000 crore twin auctions devolve on the primary dealers to the extent of Rs 5,281 crore was aimed at calming rising interest rate concerns.

The central bank fixed a cut-off yield of 8.29 per cent for 2016 bond and 8.75 per cent for the 2034 bond, which resulted in most of the bids at higher cut-off yields getting rejected.

On the previous occasion, on June 22, the RBI raised the amount of auction to suck out excess liquidity from the system.

That had created nervouness in the market and the benchmark 10 year paper yield moved over 8 per cent. The yield on the benchmark 10-year bond has risen to over 8.3 per cent since the beginning of 2006-07.