Full Subscription At Gilt Auction Unlikely

Banks are shunning the 10-year paper because the overnight money market rates have been ruling high, between 10.75 per cent and 11 per cent, and the appetite for long-term securities is already very low.

The Reserve Bank however, is better equipped to take on any devolvement, as the Centre's net recourse to ad hoc treasury bills now is less than the Rs 9,000 crore mark.

At the recent auction of 91-day treasury bills on August 23, none of the primary dealers (PDs) managed to bid successfully. This was because the RBI had to keep the cut-off levels lower in order to see that banks subscribe to the 13.85 per cent, 10-year paper being put up for sale today.

The lack of PD participation in the recent 91-day paper auction, was reflected in the following day's transactions of the subsidiary general ledger (SGL), where there were no secondary market deals of the new 91-day paper. Usually, a primary dealer offloads the security it picks up at the auction, the very next day and it is reflected by a sizeable number of transactions of that paper in the SGL account transactions of the RBI.

If the RBI pitches the yield on the 91-day paper higher, it gives a signal of tightness in money market and an even lower appetite for the 10-year paper, said one dealer. One primary dealer pointed out that most of the PD quotes were at 10.25 and 10.5 per cent.

With tightening overnight money rates, the RBI has been forced to push up the rates continuously over the past two auctions, from 8.48 per cent to 9.48 per cent and then further up to 10 per cent.

The August 23 auction of the 91-day paper received competitive bids worth only Rs 225 crore, whereas the amount received from non-competitive bids was Rs 1,000 crore. This indicated higher participation by state government provident funds and trusts than by banks.