Floating rate bonds in the works

MONETARY POLICY 2008-09/ POLICY AND MARKETS

To make the government borrowing porgramme attractive in times of rising interest rates, the Reserve Bank of India (RBI) has mooted the introduction of floating rate bonds (FRBs).

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 as a spread over a fixed rate like that of the 364 day t- bill or 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 is being inbuilt 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 complete review of the current auction procedure for government securities aimed at improving efficiency.

The idea is to reduce the time gap between bid submission and declaration of auction results and withdrawal of facility of bidding in physical form.

A suggestion to design the secured web system, facilitating direct participation of non NDS members in auction of government securities, is also being considered.