Floating Rate Auction On Wednesday

The first auction of a floating rate government paper will be conducted by the Reserve Bank of India (RBI) on Wednesday ahead of the price-based auction of 9.85 per cent 2015 paper worth Rs 4,000 crore on Monday.

The Rs 2,000 crore floating rate paper will have a five year maturity. The interest rate on the paper will be a mark-up over a variable base rate -- calculated as the weighted average of the yields in the last six 364-day treasury bill auctions.

In its history, only once RBI sold a floating rate bond -- in 1995. However, there was no aucation and the paper was sold through open market with coupon of 125 basis points higher over the yield of 182-day treasury bills. The paper matured in 1999.

 

By virtue of its floating rate nature, the five year paper will emerge as a benchmark in money market, dealers said. Since the medium-term paper's yield will be linked to a short-term paper (mark up on 364 day T-Bill), the auction is expected to crystalise market's views on the ideal spread between a short-term and medium-term papers and help establish a yield curve.

The coupon on the paper will be paid in every six months and hence the base rate will be reset on a half-yearly basis. The base rate for the first six-month coupon period starting on November 22 will be 7.06 per cent. The yield of the 5-year paper was at 7.25 per cent as on Saturday.

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

The YTM will be calculated in consultation with the Fixed Income Money Market and Deviatives Association of India (Fimmda) . This rate will be announced by the apex bank before the commencement of every half-yearly coupon period.

Sharukh Wadia, senior vice-president and head treasury, IndusInd Bank, said that when the system is flush with liquidity, it is the right time to try out new options. "The paper will provide hedge against interest rate risk and will be very attractive compared with any other securities of similar maturity," he added.