RBI to issue floating-rate bonds after two years

Reserve Bank of India is poised to issue floating-rate bonds (FRBs) — for the first time in two years. Come this Friday, and the country’s central bank will reissue Rs 3,000 crore worth of FRBs that are set to mature in 2020.

Many believe that the yields are likely to ease, as the demand for FRBs is high in the current rising-rate environment. “These instruments will help investors manage their interest-rate risks more effectively,” notes N S Venkatesh, head of treasury at IDBI Bank. “The FRB issuance is a welcome move, as yields are currently at high levels.”

The rate of interest on FRBs is payable half-yearly. RBI will announce it before the commencement of the relative semi-annual coupon period.

Yields are also expected to soften, as RBI will purchase bonds via open-market operation (OMO) on Thursday. The details of the securities to be purchased are yet to be announced. Says a bond dealer with a public sector bank: “The success of OMOs will depend on the security that RBI chooses to buy.”

Today, yields on the ten-year benchmark bond touched an intra-day high of 8.86 per cent, before closing at previous day’s level of 8.83 per cent.

Besides FRBs, RBI is also auctioning Rs 4,000 crore of government security that will mature in 2040. The coupon rate is 8.30 per cent. Then there is another Rs 6,000 crore of government security -- maturing in 2024 with a coupon rate of 9.15 per cent.

A treasury official of a public sector bank sees the possibility of devolvement in the auction for the paper maturing in 2040. Reason: “There could be bidding for higher yields that RBI may not accept.”

For the second half of current financial year, the government will borrow Rs 2.2 lakh-crore against the earlier-planned Rs 1.67 lakh-crore. A higher-than-planned borrowing has led to yields trading at three-year high levels.