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RBI moves to uniform price auction for some govt securities

RBI moves to uniform price auction for some govt securities

02 Jul 2021

MUMBAI: The Reserve Bank of India has decided to move to uniform price auction of some benchmark government bonds to avoid volatility and wide difference to market prices of those securities.

The central bank is also said to have signalled to bidders that they need to stick close to market prices.

On a review of market conditions and market borrowing programme of the government, RBI on Friday decided that benchmark securities of 2-year, 3-year, 5-year, 10-year, and 14-year tenor, and floating rate bonds (FRBs) will be, henceforth, issued using uniform price auction method.

For other sovereign securities with 30-year and 40-year maturities, the auction will continue to be multiple price-based auction, as it was earlier.

Since the beginning of the financial year, Mint Street has had to either cancel a fair share of weekly bond sales or devolve those on primary dealers.

The latest weekly auction on Friday again stumbled as primary dealers had to take a particular series with five-year residual maturity on their books for about `10,500 crore.

In the previous weekly auctions, too, only a set of long-term papers had sailed through with little devolvement or cancellation.

“The central bank appears upset at auction participants, whose bids are often placed not in sync with secondary market levels,” said a chief manager from a large institution.

In uniform price auction, all successful bidders will be allotted papers at the cut-off price level – above which no bid is entertained – irrespective of the rate quoted by them, which would prompt many participants to bid aggressively.

Under the prevailing mechanism of multiple price method, successful bidders need to pay the price at which they bid for the allotted quantity of securities. So, if a dealer bids for papers at 6.60% but the cut-off yield comes at 6.70%, the first dealer will have to face a loss of 10 basis points compared to another dealer that bid at the threshold limit.

Earlier in February this year, the central bank tweaked the auction method for a series of difficult-to-sell bonds, bringing in a uniform price threshold that will apply to all bidders. The move was aimed at pushing back the milestones on fiscal rectitude.