Reserve Bank reverts to multiple price bids for bond auctions

Aggressive pricing of new 10-yr bond, better fiscal outlook, seen as likely reasons

The Reserve Bank of India (RBI) will revert to the multiple price method for bond auctions on Friday, after a year when the present practice of a uniform price method was adopted.

The central bank will auction a 10-year bond with a coupon rate of 8.40 per cent for a notified amount of Rs 9,000 crore on Friday. It has also announced two more bond auctions for a total of Rs 5,000 crore on the same day.

Bond auctions could be classified as either uniform price-based or multiple price-based. In the former, all successful bidders are required to pay for the allotted quantity of securities at the same rate, the auction cut-off one, irrespective of what they'd quoted. In a multiple price auction, the successful bidders are required to pay for the allotted quantity at the respective price or yield at which they bid.

Market participants said the aggressive pricing at the new 10-year bond auction last Friday could be one reason for the change. The uniform pricing method typically sees aggressive pricing. The market had priced the new 10-year bond at a coupon rate of 8.40 per cent, 27 basis points below the exiting 10-year benchmark bond.

The paper was trading at a discount on Monday, as the yield ended the day at 8.43 per cent as compared to 8.39 per cent on Friday. The yield on the 10-year benchmark government bond also rose to close at 8.71 per cent, compared with the previous close of 8.67 per cent.

“RBI might have thought the market was aggressive while pricing the new 10-year bond. The uniform pricing method was adopted when the borrowing plan was huge and the fiscal deficit was rising. RBI might have drawn comfort on both the fronts, which has triggered the move of a multiple price method,” said Jayesh Mehta, managing director and country treasurer, global markets group, Bank of America Merrill Lynch.

RBI adopted the uniform price method in June last year, when bond yields were volatile, with foreign institutional investors pulling out from the domestic markets amid a weakening currency. However, the macro fundamentals have improved since last September, with the rupee stabilising after recouping most of the losses. A new government at the Centre has renewed hope among foreign investors. It is expected to hasten the opening to foreign investment and control the fiscal deficit.

The fiscal deficit for the current financial year is targeted at 4.1 per cent of gross domestic product, as compared to 4.5 per cent in 2013-14. The recent Union Budget put the target at 3.6 per cent for 2015-16 and three per cent for 2016-17.

“RBI probably wants to see how the market reacts to different methods of auction, due to which they changed the method. Using a different method will also help to know the views of various market participants,” said the head of treasury of a public sector bank.
THERE GOES THE HAMMER

• Move comes a year after the practice of a uniform price method was adopted
• Bond auctions could be classified as either uniform price-based or multiple price-based
• In the former, all successful bidders are required to pay for the allotted quantity of securities at the same rate, the auction cut-off one, irrespective of what they'd quoted
• In a multiple price auction, the successful bidders are required to pay for the allotted quantity at the respective price or yield at which they bid