Rs 6500 Crore Gilts To Go Under Hammer Today

In a move to correct the falling yields, the Reserve Bank of India (RBI) will auction Rs 6,500 crore worth government papers tomorrow.

The securities to be auctioned are the 10.50 per cent paper maturing in 2011 for Rs 2,500 crore, 11.43 per cent 2015 for Rs 2,000 crore and 10.18 per cent 2026 for Rs 2,000 crore.

Last week the Central government had privately placed Rs 4,000 crore worth 10.18 per cent 2026 paper with the RBI. Following the auction announcement, gilts prices fell by 50-70 paise at the medium and long end.

Today, the yield on the benchmark 10-year paper dropped to 7.83 per cent from yesterday's closing of 7.99 per cent in the morning and rose to 7.90 per cent in the evening.

Dealers also said that they are expecting another round of open market operation next week, if tomorrow's auction failed to calm the market.

According to dealers, the objective of the auction is to stop the continuous decline in government security yields since the credit policy announcement on October 22.

A dealer with a private sector bank said: "The yields had come down to unsustainable levels and the fall could only be stopped through an open market auction. The market was expecting the auction in the beginning of the week, but as the RBI did not announce any auction the fall in yields continued."

Dealers are expecting all the three auctions to be oversubscribed heavily due to the excess liquidity in the system. The treasury head at a private sector bank said: "The RBI, instead of auctioning a single paper to raise Rs 6,500 crore, has put three different papers to raise the targeted amount. This will make the response even better as the market participants will be able to pick up the security of their choice."