The on-tap issue of 15-year paper announced last week by the Reserve Bank of India is perhaps the latest indication that the central bank has decided to tread more carefully in its dealings with the market.
Money dealers said after signalling that it would not give in to the higher demands of the market, the RBI is now turning around the view that it cannot fight the market sentiment for too long. Should it dig its heels in, it would be faced with heavy devolvements.
The memory of the devolvements of the 20-year and 10-year auctions over the last few weeks are probably still fresh in the mind of the RBI. At the time, the RBI decided to take a devolvement to the extent of 84 per cent of the issue size rather than opt for going along with market expectations of a higher yield. However, since then, the auctions of shorter tenor papers and the recent on tap issue of the 10.79 per cent 2015 paper seem to indicate that the RBI is willing to go along with the market's view.
That market sentiment is low is evidenced by the fact that weekly turnover in securities beyond the 2010 maturities has fallen from Rs 3,431 crore on April 28 to Rs 1,990 crore on May 12. Worries persist about the size of the total government market borrowings and the view that they will be exceeded.
The issue of the 15-year paper at par is in line with market expectations since the yields on both the 14 and 16-year paper at the time of the issue were 10.78 per cent and 10.83 per cent. "The RBI is trying to signal the interest rates for those maturities and build a yield curve in those tenors," said a market dealer. The dealer said the par offer is in sharp contrast with the auction of the 20-year paper which was issued at a cut-off of 10.70 per cent and devolved heavily on the RBI and primary dealers. Even now, the yield on the 10.70 per cent 2020 paper is at 10.74 per cent in the secondary market - far below the yields on papers of shorter maturities. For instance, the 12.60 per cent 2018 paper was trading at a yield of 10.86 per cent last week.
Most of the interest in the 15-year paper, say market players, has come from the insurance companies, the traditional buyers of these papers. "Banks, primary dealers and even the provident funds have shown little interest in this issue," says M R Ramesh, managing director, Discount and Finance House of India. In fact, LIC had been selling shorter tenor papers last week to make way for the 2015 paper.
The on-tap issue is a way for the RBI to mobilise funds through long dated papers without risking devolvement in an auction, given the fact that appetite for long dated papers is still weak. It is also a way to avoid further auctions in the shorter to medium-term maturities given the stated aim of lengthening the average maturity of market borrowings. The most important objective is to test market sentiment.
"Liquidity has been strained as evidenced by the Tier-I refinance figures at levels of Rs 14,000 crore and the tightness in the call money markets. With good inflows this week, that pressure is expected to ease," said the chief dealer at a private bank. An on-tap issue was a way of raising money without affecting market sentiment, which in such circumstances would be fragile, he said.
