3 min read.Updated: 17 Jul 2013, 11:41 PM ISTAnup Roy
Central bank fails to sell treasury bills worth `12,000 crore at auction on Wednesday
Mumbai: The monetary tightening by the Reserve Bank of India (RBI) is likely to haunt the central bank in the coming days, with the first sign of a clash with investors becoming apparent after the central bank had to cancel sales of two short-term government papers.
RBI failed to sell treasury bills (t-bills) worth ₹ 12,000 crore at Wednesday’s auction after investors demanded high interest rates, or yields, on the papers. Yield and bond prices move in opposite directions. Treasury bills are short-term government papers maturing in less than a year.
For a ₹ 5,000 crore auction of six-month t-bills, RBI received bids worth ₹ 14,682.5 crore, or nearly three times the amount offered. For a ₹ 7,000 crore auction of a three-month paper, RBI received bids worth ₹ 14,595.66 crore. Bond dealers say this showed that the market is ready to lap up bonds even in a tight liquidity situation, provided the pricing is right.
Following the monetary-tightening measures late on Monday, where RBI said banks can only borrow ₹ 75,000 crore from the central bank at the repo rate of 7.25%, but any additional amount will have to be borrowed at a steep rate of 10.25%, yields on the three-month bills shot up to 9.24% on Tuesday from 7.47%. The last 91-day t-bills were sold at a yield of 7.48% on 10 July, and 182-day bills were sold at 7.6% on 3 July.
Although investors’ bids were not made public, the present market rate for the treasury bills is what they bid in auctions. After rates spiked on Tuesday, various state governments withdrew their bond sales after they were able to sell only a little more than ₹ 2,000 crore of a total ₹ 8,600 crore bonds at a desired price.
In the coming days, bond dealers are unlikely to lower their demand for high yields on auctions till liquidity is restored. Yields on the 10-year bond have spiked by 50 basis points, or 0.5 percentage point, after RBI’s monetary tightening measures. Even though government officials have said the measures are temporary, yields will rise as long as the liquidity crisis continues or aggravates. This will put in jeopardy the government’s plan to borrow about ₹ 3.7 trillion through bond auctions in the second half of this fiscal as investors are likely to continue to seek steep rates.
The refusal to reject all bids in a government bond auction is rare. Such bond auctions are usually called off before the auctions have taken place. If RBI is not comfortable with yields sought by investors, the central bank typically allots some papers to the lowest-yield bidders and the rest is sold to underwriters of the auction, known as primary dealers. However, the cancellation, despite heavy demand, showed there were no bids at yields that would satisfy RBI’s expectations.
“It clearly shows that they (RBI and the government) were not prepared for such a reaction from the market," Prasanna said.
However, following Wednesday’s auction results, yields on the 10-year bond crashed as the market judged that RBI will not tolerate such high yields. The yields on the 10-year bond fell from 8.13% to 8.05% after the t-bill auction results were announced.
“The market took heart that the t-bill auction yields were not granted by the Reserve Bank, which showed that RBI is signalling the market that there is no need for such high yields as the measures are temporary and soon rates will normalise and liquidity restored," said Harihar Krishnamurthy, head of treasury at FirstRand Bank.
RBI is to sell ₹ 12,000 crore of bonds in the secondary market to suck out further liquidity as part of the central bank’s open market operation. Under this programme, RBI has so far bought bonds to aid liquidity. Bond dealers doubt the central bank will be successful in selling these bonds at a rate it is comfortable with.
“If tomorrow (on Thursday) they chase the bids in the OMO (open market operation) sales, yields will go up further," said Prasanna.