After three years, RBI returns to multiple price auctions for govt bonds

The Reserve Bank of India (RBI) will conduct all auctions of government securities under the market borrowing programme of the Government of India using the multiple price auction method, the central bank said on Monday.

RBI has changed the methodology after nearly three years. The change in methodology comes as robust demand is expected for government bonds due to various factors like inclusion in JP Morgan’s Emerging Market Bond Index and rate cut expectations.

Since July 2021, the RBI has been conducting auctions for bonds, under uniform pricing, except for ultra-long duration bonds maturing in 30 years and beyond.

In the multiple price-based auction system, successful bids will be accepted based on the quoted yield or price for the security specified by the bidder. Under the uniform pricing method, bonds are sold at the cutoff level.

“Normally uniform price is deployed when the market is well-supplied and there is inadequate demand. But it is the reverse situation now; the demand-supply equation seems to be in favour of demand. So, it is a good market now in the sense, the yields look like coming off and prices going up. In that scenario, a multiple price auction will be better,” said Vikas Goel, Managing Director and Chief Executive Officer, PNB Gilts.

“One, the price discovery will be more efficient. Second, there will be more post-auction results trading activity. Third, it avoids what I call lazy bidding. So, you have to think before you bid because there is a winner's curse. And fourth, overall, I would tend to think that the yield at which the issuer can raise money will be on average lower as compared to a uniform price. So, it is a win-win,” Goel added.

The gross borrowing for the first six months of the upcoming financial year stands at Rs. 7.50 trillion, out of the total borrowing target of Rs. 14.13 trillion. In a departure from the usual pattern of issuing green bonds in the latter half of the year, the Union government plans to issue green bonds worth Rs. 12,000 crore in the first half of 2024-25. These bonds shall be issued in two tranches of Rs. 6,000 crore each, with a maturity period of 10 years.

“A little more trading will take place. People will take better funds. Uniform price auction is obviously less beneficial for people who want to take a view on markets. It's a safer way of auctioning. This gives a little more spectrum to various investors to play across the cost,” said the treasury head at a private bank.

“From an investor perspective, given that you're targeting to sell G-sec to a whole host of people, it'll make it more attractive. It's no longer very safe and mundane. It makes it a little more exciting for various people to participate,” the person added.