The Reserve Bank of India (RBI) will conduct an auction of the 12.59 per cent 2004 government papers worth Rs 5,000 crore through open market operations tomorrow. The settlement of the bids will be done on Friday. Dealers termed the move as a measure to suck out some liquidity from the system and bring stability to the interest rates of the government securities.
Yields in the government securities market have been touching new lows everyday as the system is flushed with liquidity. The 10-year paper dipped by 30 basis points in a week to 9.21 per cent. The open-market auction by the central bank will put a check to it.
A dealer with a private sector bank said, "There may be two reasons for it. First, the yields of government securities have almost reached an unsustainable lows for the banks. Secondly, the rupee also fell a bit in the last one-and-a-half week and the RBI might have suspected speculative forces behind the fall. These two facts might have triggered the central bank to suck out the liquidity from the market."
The auction is expected to be oversubscribed. A primary dealer said, "The liquidity is ample in the market. Moreover, off-late there has been a shift of interest for the shorter-end papers in the government security market. The RBI is likely to receive bids of at least Rs 10,000 crore for the papers." Also, dealers are expecting a fresh auction very shortly.
