RBI changes bond auction method amid stumbling weekly sales

MUMBAI: The Reserve Bank of India has decided to move to uniform price auction of some benchmark government bonds to avoid volatility and wide difference to market prices of those securities.

The central bank is also said to have signalled to bidders that they need to stick close to market prices. Since the beginning of the financial year Mint Street had either to cancel a fair share of weekly bond sales or devolved those into primary dealers. The cut-off price level, above which no bid is entertained, reported higher than the secondary market level.

On a review of market conditions and market borrowing programme of the government, the Reserve Bank of India, New Delhi’s merchant banker, Friday decided that benchmark securities of tenor 2-year, 3-year, 5-year, 10-year, 14-year tenor and Floating Rate Bonds (FRBs) will be, henceforth, issued using uniform price auction method.

The uniform price auction will permit allocation of papers at the cut-off bid, prompting many participants to bid aggressively.

For other sovereign securities with 30-year and 40-year maturities, the auction will continue to be multiple price-based auction, as hitherto, RBI said.

In the previous weekly auctions in this financial year, only a set of long-term papers mostly sailed through with little devolvement or cancellation.

The latest such auction on Friday again stumbled as primary dealers had to take a particular series with five-year residual maturity on their books for about Rs 10,500 crore.

“The central bank appears upset at auction participants, whose bids are often placed not in sync with secondary market levels,” said a chief manager from a large institution.

If a dealer bids for papers at 6.60% but the cut-off yield above which none will receive allocation comes at 6.70%, the first dealer will have to face a loss of 10 basis points compared to another dealer that bid at the threshold limit. This is the prevailing mechanism under the multiple price method.

Earlier in February this year, the central bank tweaked the auction method for a series of difficult-to-sell bonds, bringing in a uniform price threshold that will apply to all bidders. The move was aimed at pushing back the milestones on fiscal rectitude.