RBI's bond auction devolves partially

In Friday's auction, the central bank had switched from uniform-price method to multiple-price method

The Reserve Bank of India's (RBI) government bond auction worth Rs 14,000 crore devolved partially on Friday to the tune of Rs 3,445.5 crore. This means the primary dealers, who buy from the government and resell, were left with unsold bond. This is the third bond auction in the current financial year that devolved partially. According to traders, the key reason for the same is the change in the auction method.

In Friday’s auction, RBI had switched from uniform-price method to multiple-price method. In the last one year, RBI had followed the uniform-price method. The previous partial devolvements had taken place in April and June.

Three government bonds were to be auctioned on Friday, out of which two devolved partially. These were the 8.27 per cent 2020 for Rs 482 crore and the new 10-year bond 8.40 per cent 2024 for Rs 2,963.50 crore. The 9.23 per cent 2043 bond sailed smoothly in the auction.

“The devolvement was probably because RBI had changed the auction method to multiple price from uniform price earlier. Traders may have put in bids at a lower prices thinking that if cut-offs come at lower price, they can get better yields. But probably, RBI was not comfortable at such lower level of bids due to which it resulted in partial devolvement,” said a senior official of an insurance company.

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 had 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.

“RBI is probably not comfortable with traders bidding at such levels. Besides, the bond market has also been bearish ahead of the policy. Traders exercise precaution ahead of monetary policy,” said a bond trader with a state-run bank.

The yield on the 10-year benchmark bond ended at 8.76 per cent compared to the previous close of 8.72 per cent. The yield on the new 10-year bond ended at 8.52 per cent, compared to the previous close of 8.50 per cent. The new 10-year bond was auctioned last Friday.