Rbi In A Spot Over 11-Year Gilt Auction

The yield-based auction of Rs 5,000 crore worth of 11-year paper next week presents the central bank with a dilemma.

With sentiment being strongly bearish in the securities market in general and long-dated paper in particular, there is a strong possibility that the paper may devolve on the RBI and primary dealers. If the central bank tries to avoid a devolvement, it could cause the already fragile sentiment to weaken further. After this auction, 25.4 per cent of the gross borrowing programme of Rs 1,16,861 crore would be completed.

Poor sentiment in the long end of the market has been evident for some time now and there have been devolvements in two auctions of 10 and 20-year papers.

 

A recent on-tap issue of 15-year paper which raised over Rs 2,600 crore and the fact that primary dealers are still stuck with long-term papers from the earlier auctions means that appetite for long papers continues to be very low.

The main player in the long end, the Life Insurance Corporation, had picked up a substantial amount of the on-tap 15-year issue. "The market may not have any further appetite for long paper so soon after the on-tap issue," said a dealer.

Given this, the RBI has two options. It can choose to meet expectations and offer a higher yield. Dealers feel the central bank would have to offer a yield of at least 10.95 per cent since the 10-year paper is trading in that range. The only 11-year paper floating, the 12.32 per cent 2011, was last traded at a yield of 10.94 per cent.

Further, to induce primary dealers (who already saturated with long-term paper) to hold more, the central bank would have offer a high underwriting commission. "Many participants are talking of a commission of at least one rupee, but the problem is that even with such a level, primary dealers may be unwilling to absorb the entire amount because appetite is so weak," said one.