The Reserve Bank of India (RBI) is understood to have asked primary dealers(PDs) to bid at Government Security (G-Sec) auctions at yields closer to the prevailing secondary market level.
This comes in the backdrop of some PDs bidding at higher yields (or quoting lower price) to buy G-Secs at auctions at a time when the government borrowing programme for FY22 is huge at ₹12.10 lakh crore.
Currently, the central bank is undertaking G-Sec Acquisition Programme (G-SAP) as well as special open market operations to keep the yields under check.
So, the central bank expects PDs, whose primary role is to support the Government’s market borrowing programme and improve the secondary market liquidity in G-Secs, to bid accordingly as they get a fee for their underwriting commitment at G-Sec auctions.
Cost of borrowing
Market players say if yields quoted by bidders at G-Sec auctions are higher than the prevailing secondary market yields, the RBI either devolves the auction on PDs or rejects all the bids. This ensures that the Government’s cost of borrowing does not go up.
Meanwhile, on a review of market conditions and market borrowing programme of the government, RBI has decided that the benchmark securities of 2-year, 3-year, 5-year, 10-year, 14-year tenors and floating rate bonds (FRBs) will be, henceforth, be issued using uniform price auction method.
For other benchmark securities — 30-year and 40-year — the auction will continue to be multiple price-based auction, as hitherto.
In a uniform price auction, all the successful bidders are required to pay for the allotted quantity of securities at the same rate at the auction cut-off rate, irrespective of the rate quoted by them. In a multiple price auction, the successful bidders are required to pay for the allotted quantity of securities at the respective price/ yield at which they have bid.
At the weekly G-Sec (GS) auction,the RBI devolved about 95 per cent of the notified amount of ₹11,000 crore the Government wanted to raise through the 2026 G-Sec (coupon rate: 5.63 per cent) on PDs.
Greenshoe amount
The auction of three other papers — Government of India FRB 2033 (notified amount: ₹4,000 crore), 6.64 per cent GS 2035 (₹10,000 crore) and 6.67 per cent GS 2050 (₹7,000 crore) — sailed through. In fact, RBI accepted greenshoe amount of ₹2,500 crore in the case of GS 2035.
In the secondary market, yield on the devolved 2026 G-Sec went up about 5 basis points to close at 5.75 per cent(previous close:5.70 per cent), with its price declining about 21 paise to close at ₹99.49 (₹99.70).
Bond yields and price are inversely related and move in opposite directions.