Mumbai: Ahead of the quarterly review of monetary policy on 29 July, the Reserve Bank of India (RBI) auctioned Rs6,000 crore worth 10-year bonds on Thursday at a cut-off yield of 9.0785%.
Yields and prices of bonds move in opposite directions.
Following this, the benchmark 10-year bond yield, which was trading at 9.01% until late Thursday afternoon, rose to 9.09%.
While it is not exactly an indication of market expectations from the monetary policy to be unveiled next week, bond dealers say they are trying to figure out the underlying meaning of two important moves of the central bank involving the auction.
RBI was originally slated to auction a 14-19 year bond but, later pared the maturity to 10 years. It has also used the uniform pricing method to auction the bonds after a gap of two years.
Normally, government bond auctions follow the practice of multiple pricing.
This is also for the first time the buyers of government bonds, such as banks, insurance firms and primary dealers, had to make bids without being aware of the latest inflation figures.
Traditionally, RBI holds such auctions on Fridays and bids are made after the inflation figures are released. Bond dealers use the inflation data to gauge the interest rate movement.
Since last week, the ministry has started releasing the inflation figures on Thursday evening instead of Friday noon.
“One can interpret the paring of maturity of the bond as a signal from the banking regulator on the interest rate outlook. The rates will go up and it does not want financial intermediaries to lock themselves in for longer period as they will have to take the hit and make good the depreciation in value of bonds,” said a dealer who didn’t want to be named.
J. Moses Harding, head of the wholesale banking group at IndusInd Bank Ltd, also echoed the same view. “Probably RBI is taking a view that interest rates are on the higher side,” he said. “So, why lock in for a longer period and pay more?”
Some other dealers say the central bank shifted to a 10-year bond for the auction because of the low demand for longer term papers.
“Insurance companies that generally buy longer term papers, don’t have much surpluses to buy longer term bonds,” said Harihar Krishnamurthy, head of treasury of Development Credit Bank Ltd.
According to Joydeep Sen, vice-president, advisory desk of BNP Paribas, the auction of a 10-year paper instead of a longer term bond, is possibly to reduce the borrowing cost of the government as longer bonds command higher interest rates.
“Possibly the government is trying to fine-tune its borrowing cost and it also wants to issue more liquid papers to boost the sentiment,” Sen said.
Uniform price auction
Under uniform price method, all successful bidders receive the bonds at the cut-off prices irrespective of their biddings while in multiple price auctions, bidders receive bonds at their bidding prices as long as they are within the range of the cut-off price.
According to bond dealers, the uniform pricing was adopted to shield investors from higher volatility.
“Probably RBI wanted a better pricing. Uniform pricing normally ends up at slightly more bullish than multiple pricing. You don’t have the bidding risk or ‘winner’s curse’ there,” said A. Prasanna, vice-president, ICICI Securities Primary Dealership Ltd, a firm that buys and sells bonds.
A “winner’s curse” happens when a bidder overpays to buy bonds in multiple auctions. In case the prices go down, the aggressive bidders lose the most.
The government wants to raise Rs96,000 in bonds in the first half of the financial year. So far it has raised some Rs66,000 crore.
A NewsWire18 story of 22 July quoted an unnamed finance ministry official as saying that the bidding was done on Thursday to “beat release of inflation data”.