Bond traders request RBI to shift to multiple price auctions of govt debt

At a recent meeting with senior officials of the Reserve Bank of India, participants in the government bond market suggested that the central bank shift back to the multiple price method for primary auctions of sovereign debt, sources told Business Standard.

The meeting was one of a series of interactions held with RBI officials before the release of the Centre’s market borrowing calendar for the first half of the next financial year. The borrowing calendar for April-September is usually released around the end of March.

The RBI is the government’s debt manager. In the Union Budget for 2023-24, the government announced a gross borrowing programme of Rs 15.43 trillion for the next fiscal year, a fresh high. The government typically conducts a larger portion of borrowing in the first 6 months of the financial year, a practice referred to as ‘front-loading’.

In accordance with the revised estimate in the Budget, the government borrowed Rs 14.21 trillion through the sale of dated securities on a gross basis in the current financial year.

“Amongst the discussion points was a suggestion to shift back to the multiple price method auctions for benchmark bonds. At present, only the auction of the longest-maturity bond is done through multiple prices,” a source said.

“When the RBI had shifted to the uniform method in 2021, there was a huge amount of volatility at auctions. Auctions were constantly being devolved on primary dealers. But that is not really the case now. The multiple price method provides some flexibility to those bidding,” the source said.

An email sent to the RBI did not receive a response by the time of going to press.

In July 2021, the RBI had decided to shift the method for auctions of 2-year bonds, 3-year bonds, 5-year bonds, 10-year bonds and 14-year bonds to the uniform price method from the multiple price method. At that time, several sovereign bond auctions had landed on the books of underwriters as hardening inflation numbers and heavy supply had eroded appetite for government debt.

In a uniform price auction, traders are wary of bidding at price levels that are way off the prevailing price of a bond in the secondary market.

In a uniform price auction, all bidders receive stock at one particular price set by the RBI unlike a multiple price auction where the central bank allots stock to all entities which have placed bids above the cutoff price.

When the view on bonds is uncertain, the uniform price auction method can curtail volatility as placing bids far away from prevailing price levels poses the risk of not being allotted bonds. The multiple price method provides market participants with more flexibility in pricing bonds based on the evolving landscape of inflation and debt supply.

“The RBI officials just heard out the suggestions; their point of view was that suggestions should be made rather on technical factors that could help the borrowing programme rather than the interest rate expectations of different market players,” a source said.

“Other suggestions included a reiteration of the demand for a 20-year benchmark bond, given the strong demand shown by insurance companies and some estimation on how much the government could borrow through green bonds next year,” the source said.