Floating rate bonds deferred

MID-TERM MONETARY POLICY 2008-09/ Policy & Markets

The Reserve Bank of India said today that it would issue Floating Rate Bonds (FRBs) at an appropriate time factoring in prevailing market conditions.

Such instruments will help bond-holders to manage interest rate risks as returns get adjusted to market trends.

Usually, banks and primary dealers shun securities in a rising market because a rise in yields means fall in price of the bonds and results in a loss of value.

Dealers say that an FRB carries a variable coupon unlike fixed rate government bonds. These variable coupons are pegged at a spread over a fixed rate like that of the 364-day treasury bill, or the current market yield of the benchmark ten-year bond.

The Clearing Corporation of India (CCIL) is working on a new issuance and auction format structure for FRBs which will be built into the NDS current auction format.

The auction format will also help price FRBs in the secondary market. CCIL acts as a clearing corporation for government securities and money market deals routed through the RBI.

This step is part of a complete review of the current auction procedure for government securities aimed at improving efficiency.