RBI partially devolves 7-year paper on PDs

Our Bureau | | Updated on: Sep 02, 2022

| Photo Credit: FRANCIS MASCARENHAS

RBI wanted to maintain 5-6 bps spread between 7-year and 10-year paper

The Reserve Bank of India (RBI) partially devolved the seven-year Government Security (GS) on primary dealers (PDs) at the Friday weekly auction in a bid to maintain the normal 5-6 basis points spread between this paper and the 10-year paper.

At the auction, while the 7.10 per cent GS 2029 partially devolved on the underwriters, the remaining three papers (6.69 per cent GS 2024; 7.26 per cent GS 2032; and 6.95 per cent GS 2061) sailed through, with the government raising the overall notified amount of ₹33,000 crore.

Marzban Irani, CIO-Fixed Income, LIC Mutual Fund, observed that some of the bidders would have resorted to tail bidding at higher yields of 7.18 to 7.20 per cent for the seven-year paper when the yield on the 10-year paper was around 7.21-7.23 per cent.

As the spread between these two papers was narrowing from the normal 5-6 basis points (bps), the RBI may have partially devolved the seven year paper, he added. One basis point is equal to one-hundredth of a percentage point.

The RBI devolved about 36 per cent of the notified amount of ₹7,000 crore, the government wanted to raise via the seven-year paper.

The cut-off yield of the seven year paper and the 10-year paper came in at 7.1632 per cent and 7.2195 per cent, respectively, with the spread between the two papers being maintained at about 6 bps.

In the secondary market, GS yields rose as bidders sought higher yield (wanted to buy papers relatively cheaper) at the auction in the wake of rise in US treasury yields.

Yield of the current 10-year benchmark GS (coupon rate: 6.54 per cent) nudged up 2 bps to last trade at an yield of 7.2318 per cent (previous close; 7.2146 per cent). Price of this paper declined 11 paise to close at ₹95.34 (₹95.45).

Bond prices and yields are inversely corelated and move in opposite directions.

Published on September 02, 2022
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