Tuesday, December 15, 2015

RBI Rejects Bids at Bond Sale for Second Consecutive Week

Bond sale

RBI Rejects Bids at Government Bond Sale


The Reserve Bank of India rejected all the bids at its 150 billion rupee government bond sale including the benchmark 10 year debt, recently, marking the second week consecutively when it did not accept some of the bids. The RBI had only accepted 49.4 billion rupees worth of bids for its sale of 70 billion rupee of 2025 bonds and had accepted only 22.9 billion rupees of the 30 billion rupees worth of 2034 bonds that were being sold.

 The balance three bonds had been totally allotted. RBI has the option of not accepting all bids at the debt auctions through a procedure known as a `devolvement’, which tends to lead underwriting dealers to purchase some of the shortfall in undersubscribed tenders at determined cut-off yield. According to a treasurer at HDFC, Ashish Parthasarthy, he comments that `the yield may not be acceptable and they would find it too high’.The devolvement has come up when the RBI is tied up in a complicated balancing act with domestic yields in order to keep the volatility away from its bond markets ahead of the policy decision of the Federal Reserve this month.

Fourth Auction with Weak Bids/High Yields


This seems to be the fourth auction which has seen weak bids and demands at high yield levels from the market. The RBI may not have been relaxed giving a cut-off which did not reflect its accommodative monetary position, according to bond traders.

The government is scheduled to raise Rs 15,000 crore by allotting four bonds at the weekly auction. Presently the craving for bonds is quite low in the market and several investors have incurred losses after yields shot up sharply after the policy statement and are now being careful according to the managing director of ICICI Securities Primary Dealership, B. Prasanna. Government bond earnings have increased by at least 10 basis points over the last one week as an aggressive policy statement from RBI, the effects of global bond sell-off earlier in the month as well as anxieties over domestic inflation that kept several buyers at bay. The 10 year benchmark 7.72%, 2025 bond yield closed at 7.8%, up 10 bps from the earlier week. The bond has suffered losses for all investors who had bought it at the maiden auction in May.

Last Devolvement – June 12


In the policy of June, the RBI had reduced its repo rate by 25 bps, but had raised it inflation forecast to 6% for January and had commented that it has frontloaded its rate cuts. This however brought about expectations of the future rate cuts sharply down in the bond market. Moreover, the bond yields from US to Europe has also increased to multi-month highs since the investors deserted fixed income in the midst of rising oil prices as well as the forthcoming rate hike by the US Federal Reserve.

The last devolvement of RBI had been on June 12, when the sentiments seemed negative owing to high inflation reading. An official aware of the central bank’s decision in explaining the devolvement had informed that `the bids had come at much higher yields’. He had added that the central bank was also certain in not devolving in too big an amount to avoid destabilising the markets.

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