Uniform Price Auction For 91-Day Bills; 28-Day Bill To Be

The uniform price auction system has been introduced with a view to eliminating the problem of "winners' curse" and broaden market participation. "Given the underdeveloped nature of the Indian debt markets and lack of reliable information, there are wide differences in the yield expectations before the auctions.

The introduction of uniform price auction will reduce uncertainty associated with the bidding process", says S K Muk-erji, managing director, DFHI.

Presently 14-day, 91-day and 364-day T-bills and dated securities of the government of India are auctioned under the multiple price system. At the cut-off yield or cut off price, all bidders at or below the cut-off-yield or price, are allocated up to the amount bid.

 

Those bidding at lower than the cut off, end up paying a premium and this is known as the 'winners curse'. With the introduction of uniform system in case of 91-day T-bills, it is expected that less skilled bidders like corporates will be emboldened to participate at the auctions.

Interestingly, last month at the SBI Cap Debt Market Seminar, RBI governor had pointed out that the multiple price auction is the most popular method since every bidder gets the allocations according to their bids quoted and the issuer collects a premium.

He had also pointed out that Germany switched to a multiple price auction system because uniform price system had resulted in small banks placing very high bids as this gave them sure access to liquidity without the risk of having a significant impact on the price to be paid.

The 14-day and 28-day T-bills are expected to help the cash management systems of various segments of the economy. In April, RBI had announced that it would introduce T-bills of varying maturities and had introduced the 14 day T-bill. However S R Kamath, DGM, Securities Trading Corporation (STCI), feels that RBI should have introduced the 28-day treasury bill in lieu of 14 day T-bill and lengthened the period of repos to 14 days.

He believes that for the development of a secondary market it is necessary that importance is given to one or two treasury bills rather than have four T-bills of varying maturities. Corporates wishing to invest their short term surpluses can pick up the paper from secondary market rather than from primary auctions.

Mukherji however feels that introduction of 28 day T-bill should help those banks which have been rolling over their funds at the 14 day T-bills auctions for they will get a higher yield on this paper.

Giving into the wishes of the market RBI has decided to announce a notified amount in case of 14 day and 364 day T-bills and it is expected that RBI would tinker with the notified amount on 14 day treasury bill with a view to creating a secondary market. If the notified amount is less than the demand from the market then there will be a pick up in secondary market activity.

The RBI has also decided that the bids tendered by the non competitive bidders, i.e. state governments, provident funds and the Nepal Rastra Bank would be kept outside the notified amount. Given that the chunk of the funds will be raised through competitive bids, it is expected that it will lead to better price discovery.

The market perceives the steps towards revamping the auction system as a positive step and N Gopalakrishnan, MD, SBI Gilts feels that the next logical step for RBI would be to review the frequency of auctions.

For some time, the US, UK and Germany experimented with the uniform price auction system but later gave it up. Germany switched back to multiple price auctions because the uniform system had resulted in small banks placing very high bids as this gave them access to liquidity without the risk of a significant impact on the price to be paid.

--- C Rangarajan at the SBI Cap Debt Market Seminar in September