5-Year Floater Gilt Subscribed 416%

The auction of the five-year floating rate bonds received an overwhelming response and was oversubscribed 416 per cent (Rs 10,315 crore) against the notified amount of Rs 2,000 crore.

The cut-off mark-up decided at the auction was -0.05 per cent. Based on the mark-up, the rate of interest on the paper for the first half of the year works out to 7.01 per cent. The Reserve Bank of India (RBI) accepted 7 bids for the notified amount.

The interest paid has been arrived at by adding the cut-off mark-up to a variable base rate, which is the average of the implicit yields at cut-off prices emerging in the immediate previous six auctions of the 364-day treasury bill auctions.

 

If the 364-day treasury bill is discontinued, the applicable variable base rate will be the average yield-to-maturity (YTM) on 1-year government paper as on the last six reporting Fridays.

The YTM will be calculated in consultation with the Fixed Income Money Market and Derivatives Association of India (Fimmda). The base rate will be calculated semi-annually.

As per the RBI calculation, the base rate for the first coupon period is 7.06 percent and hence the rate payable will be 7.01 percent.

Dealers say that the paper was good for investment, but not good for trading. Said a primary dealer, "The coupon of the paper will be reset after every six months and it will make the pricing of the paper difficult. However, it will be a good short term investment, as it will provide hedge against interest rate risk."

The short-term securities, which are relatively stable compared with the longer-term medium-term ones, may rally after the auction.

The treasury head of a private sector bank said, "There is hardly any secondary market trading for short-term securities. The auction cut-off will give an indication of what should be the yield for the five-year paper and can encourage trading of securities with 1- to 5-year maturities."