Tag: primary dealers

RBI’s short-term paper devolves; 10-year G-Sec unsubscribed

Banking & Finance

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Government securities (G-Sec) prices dropped on Friday as the weekly G-Sec auction saw the short-term paper devolve on primary dealers (PDs) and the 10-year paper going unsubscribed.

Price of the benchmark 2030 G-Sec (coupon rate: 5.85 per cent) declined about 12 paise over the previous close, with its yield going up about 2 basis points. This paper was last traded at ₹98.725 (yield: 6.0285 per cent).

Bond yields and price are inversely related and move in opposite directions.

At the auction of the 2023 G-Sec (4.26 per cent), almost 97 per cent of the notified amount of ₹3,000 crore devolved on PDs. PDs are financial intermediaries which support the Government’s market borrowing programme and improve the secondary market liquidity in G-Secs.

Though the RBI received 99 bids aggregating ₹18,782 crore against the notified amount of ₹14,000 crore at the auction of the 10-year G-Sec, it neither accepted any bids nor did it devolve the paper on PDs.

The only paper that got fully subscribed was the 2061 G-Sec (6.76 per cent). In fact, green shoe amount of ₹48.454 crore was accepted over and above the notified amount of ₹9,000 crore.

Hardening yields

Marzban Irani, CIO-Fixed Income, LIC Mutual Fund, said: “In last few days, yields have been hardening at short end. With inflation inching upwards, Brent crude up…there are fewer bidders for short papers. Probably due to this the paper got devolved.”

Irani observed that volumes in the existing 10- year benchmark are dropping on expectations of a new benchmark being issued. Probably, the bids were at uncomfortable levels, resulting in RBI not accepting any bids at the auction of this paper.

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RBI’s heavy lifting helping govt borrow at lower cost

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The Reserve Bank of India (RBI) had clearly saved the day for the government in helping it borrow money at lower cost during the January-March 2021 quarter, despite spike in its borrowings, the latest quarterly public debt management report showed.

The government announced additional borrowing of ₹80,000 crore for FY21 in the Budget on February 1 this year, which led to a situation where the market found it difficult to absorb the supply. The yields also reacted negatively due to high fiscal deficit proposed in FY22 and higher-than-projected fiscal deficits for coming year.

Besides, rising crude prices and the gross borrowing amount of ₹12.06 lakh crore — more than market expectations — contributed to the hardening of the yields.

However, it is the RBI’s Monetary Policy Committee which gave comfort to the market by keeping Repo rate unchanged at 4 per cent at its meeting on February 5 and also announced the continuing with accommodative stance as long as necessary — atleast during the current financial year (2020-21) and into the next financial year (2021-22), the report highlighted.

OMO, G-Sec and Yield

The continuous announcement of Open Market Operations (OMO) by RBI, the US Federal Open Market Committee’s to keep interest rates near zero through 2023, lower demand by the real sector, cancellation of G-sec auction in the last week of March supported the yield, the quarterly public debt management report released by the Finance Ministry on Friday highlighted.

Commenting on the finance ministry’s report, Madan Sabnavis, Chief Economist, CARE Ratings, told BusinessLine: “Public debt management report of the government released today shows that the RBI played a critical role in managing the yield curve in FY 21 and hence facilitated a large government borrowing programme. While the room to lower repo rate below 4 per cent was limited large purchase of around ₹3 lakh crore of OMOs as well as operation twist (where different maturities are bought and sold) combined with TLTROs helped to stabilise the yields at a time when there was too much paper in the market”.

He highlighted that the same scene continues this year too with the RBI overtly stating that one of the objectives of the monetary policy is to manage the yield curve.

Liquidity woes

Meanwhile, a report from CARE Ratings on Friday highlighted that ₹26,000-crore government paper auctioned by the RBI on Friday saw a mixed response. Once again, the response to the 5.85 per cent 2030 paper was negative and it went unsubscribed. There have been two earlier occasions when the ten-year paper devolved on the primary dealers.

The market is still demanding more from the government given the large borrowing programme as well as the rising inflation trend, according to CARE Ratings. Since the beginning of the pandemic last year, the RBI has had to face the challenge of providing enough liquidity to finance the increased government borrowing without allowing interest rates and bond yields to rise. The central bank continues to face the same challenge in the current fiscal too, say economists.

The other major concern is that despite adequate liquidity infusion and reduction in interest rates, the growth of credit has remained at a low pace.

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Devolvement pushes G-Sec yields higher

Banking & Finance

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The first weekly Government Securities (G-Sec) auction of the fiscal year 2022 (FY2022) devolved on primary dealers, triggering a sell-off in the secondary market, with yields of most G-Secs going up.

Of the four G-Secs put up for auction, the RBI devolved the bonds maturing in 2026 on PDs. Of the notified amount of ₹11,000 crore, PDs, who underwrite the auctions, had to absorb ₹10,926.29 crore worth of the paper. In the auction of other three papers — Government of India Floating Rate Bonds maturing in 2033 (notified amount: ₹4,000 crore), new G-Sec maturing in 2035 (₹10,000 crore) and 6.67 per cent G-Sec maturing in 2050 (₹7,000 crore) — the Government exercised the greenshoe option aggregating ₹5,853.23 crore.

Marzban Irani, CIO-Fixed Income, LIC Mutual Fund, said: “The government has done additional borrowing by exercising the greenshoe option. During the auction, most bidders would have sought a higher yield for the new G-Sec 2026. So, the RBI devolved this paper at 5.63 per cent. The market is trying to take the yields up, but they (RBI) are trying to bring the yields down. There is a tug-of-war,” Irani said. He observed that inflation data will be announced on Monday and the expectation is that G-Sec yields will drift higher. The exercise of the greenshoe option at the auction and the devolvement had their impact on the secondary market, with yields rising on most securities.

The yield on the G-Sec maturing in 2035 rose about 3 basis points to close at 6.5894 per cent.

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