RBI rejects bids for 2037 paper at OMO as banks quote prices above market

RBI rejected bids for the 7.18 per cent 2037 security as quoted prices were above market levels, but purchased ₹50,000 crore of gilts in line with the notified amount

Bids for the 7.18 per cent 2037 security were turned down at the auction on Monday because banks bid higher than the market price for the paper, which the Reserve Bank of India (RBI) declined.

 

However, the central bank purchased securities worth ₹50,000 crore in line with the notified amount. It received bids worth ₹1.42 trillion.

 

“The bids for the 2037 paper came at levels higher than the market price, and hence were not accepted. It was not an issue of demand,” said V R C Reddy, treasury head, Karur Vysya Bank.

 

“Demand was particularly strong for the old benchmark 7.10 per cent 2034 bond, which was accepted at around ₹101.18, roughly 10 paise above market expectations of ₹101.05-101.10 and about 12 paise higher than the previous session’s closing price,” he added.

 

 

The RBI on December 24 announced liquidity measures, including purchases of ₹2 trillion through open market operations and a three-year dollar/rupee buy-sell swap of $10 billion.

 

The RBI also accepted a large amount of the 7.61 per cent 2030 bond, taking in close to ₹13,700 crore, largely at prices just above market levels.

 

Traders said the central bank appeared to be favouring liquid, well-held securities, especially former benchmarks, to ensure effective liquidity transmission.

 

Unlike the previous two purchase auctions, where aggressive tendering had pushed up prices of some bonds into a premium, the latest auction saw most securities being offered at a discount.

 

Dealers attributed this to quarter-end profit booking by banks, as well as expectations that yields would remain under pressure, allowing investors to re-enter positions later.

 

“In the last two OMOs, there was heavy tendering and some papers went at a premium. This time, banks seem to have booked profits ahead of the quarter-end,” said Anshul Chandak, head of treasury, RBL Bank.

 

Traders expect the RBI to focus on more liquid and on-the-run or near-benchmark papers in upcoming OMO purchases. Securities just ahead of the current benchmark, such as the previous benchmark 2035 bond, could feature in future operations, alongside bonds in the five- to 10-year segment, where liquidity conditions are typically deeper.

 

“If the objective is to provide liquidity, the RBI is likely to choose papers that are well held but have seen relatively low supply in recent auctions, improving the probability of a successful OMO,” said Chandak.