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The Reserve Bank of India's (RBI) move to conduct government bond auctions with the uniform price auction method instead of the multiple price auction method has not been successful in arresting the rise in yields. This is because of the weakening of the rupee against the dollar.
The rupee weakened to a record all-time low of Rs 61.21 per dollar on Monday due to which the yield on the 10-year benchmark touched 7.63% during intra-day trades. The rupee finally ended the day at Rs 60.62 compared with previous close of Rs 60.24. While the yield on the 10-year benchmark 7.16% 2023 bond ended at 7.57% compared with previous close of 7.50%.
Under the uniform price auction method all successful bidders are required to pay for the allotted quantity of government securities at the same rate which is the auction cut-off rate. This will be irrespective of the rate quoted by them. While under multiple price auction method the successful bidders are required to pay for the allotted quantity of government securities at the respective rate at which they had bid.
RBI started following the uniform price auction method from the government bonds auction on June 21. “RBI's aim was the arrest the rise in bond yields by adopting this method. However, as the rupee has been weakening, following this method did not help much,” said a government bonds dealer with a mid-sized public sector bank. But the dealer accepts that in a scenario when RBI is auctioning bonds every week, if the uniform price auction method was not followed, yields would have risen even further.
As most economists are expecting a status quo on key policy rates in the first-quarter review of the monetary policy later this month, the rise in bond yields will continue. The repo rate currently stands at 7.25% and in the current fiscal it has been cut once in May by 25 basis points.
The street expects the rupee to weaken further and that will also dampen sentiments. “The rupee may touch Rs 65 per dollar sometime in 2013 and if that happens the yield on the 10-year benchmark will be at 7.80%,” said Verma, vice president (treasury), Development Credit Bank.
RBI can conduct Open market Operations (OMO) purchase of government bonds to help the bond market. However, in a scenario when liquidity is comfortable, government bond dealers do not expect OMOs in the near-term.
According to the street the central bank cannot do much even to support the rupee as the weakening is due to global factors and RBI's forex reserves are depleting.
