The Reserve Bank of India (RBI) is considering advancing the day bond auctions are conducted, to reduce volatility in the market amid the high government borrowing plan. At present, such auctions are conducted on Fridays; this might be shifted to earlier in the week, to Monday or Tuesday.
“There have been some talks on rescheduling the auction day, but some issues were raised by the Fixed Income Money Markets and Derivatives Association. They are being followed up,” said a senior executive heading the treasury operations of a European bank in India. Market participants said the move would be helpful, as the cut-off yields from the auction would be available earlier in the week.
“If you do it (auction) on a Monday or Tuesday, it gives you more time to digest the rates, rather than on a weekend after which markets are shut and you are not sure if something happens in the global markets,” added the official. “The cutoff levels in an auction on an earlier day (in the week) could set the mood for the rest of the week,” said a senior treasury official from a large public sector bank based in this city.
RBI conducts the auction for government securities on Friday (or the last day of the week in case of bank holidays) between 10.30 am and noon. The timing for competitive bids was reduced by half an hour from April 13. Earlier, the central bank would accept bids between 10.30 am and 12.30 pm. “The trading time was not getting extended and client rates were not getting cleared. Since the auction time is reduced, now the results come half an hour early and there is more time for trading,” said a bond dealer with a primary dealership firm.
Apart from conducting open market operations to ease liquidity and support the markets to create room for fresh supply, RBI has also been buying securities from the secondary market through the Negotiated Dealing System-Order Matching platform.
“RBI is open to hearing suggestions so that there is less pressure on market participants because of heavy government borrowing. It will not be surprising if the day of the auction is also changed to meet market comfort,” said the head of fixed income of a large Asian financial services firm.
The government has pegged Rs 5.69 lakh crore of gross market borrowing for the current financial year as compared with Rs 5.1 lakh crore raised in 2011-12.
With weekly borrowings of Rs 15,000-18,000 crore, the government has already raised Rs 49,000 crore through sale of dated securities till date in the current financial year.
Of the notified Rs 18,000 crore, there was Rs 1,200 crore of devolvement on primary dealers in the first government bond auction of the current financial year. As a result, yields on the 10-year benchmark government bond had soared to four-month high levels of 8.78 per cent. Though yields have softened to around 8.5 per cent, the outlook remains bleak in the backdrop of heavy supply of government securities every week.