The Reserve Bank of India (RBI) will hold auctions for all central government securities through a multiple price-based methodology from this financial year, almost three years after it changed its methodology, the central bank said on Monday.
Except for ultra-long duration, which consists of bonds with a maturity of 30 years and above, the RBI has been conducting bond auctions through uniform price-based auctions since July 2021.
In multi-price auctions, buyers are allocated bonds at the price they bid at, while uniform pricing means bonds are sold at the limit price.
India aims to borrow 7.50 trillion rupees ($90 billion) through bonds in April-September, 53% of its annual borrowing target of 14.13 trillion rupees.
“All securities under the market borrowing program will henceforth be auctioned using the multiple price auction method,” the RBI said in a statement after reviewing market conditions.
“This was a demand from market participants and this move is good for the overall market development,” said Vijay Sharma, senior executive vice president at PNB Gilts.
“Multi-price auctions are a winner’s curse, but as broader market conditions have changed we may not see a major negative reaction in returns,” said a head of treasury at a private bank.
The 2021 bond auctions saw continued devolution as traders often bid at lower prices. This led to higher than estimated cut-off yields, which impacted overall appetite, forcing the central bank to switch to uniform prices for the most liquid securities.
The RBI’s move will improve liquidity in securities as ownership will not be concentrated among a few big players who hold a lot of cash, traders added.
“There was no reward for the intelligence of market makers, which in this case are primary dealers, and uniform pricing had led to lazy trading practices,” said a senior trader at a primary dealer.
Arun Srinivasan, head of fixed income at ICICI Prudential Life Insurance, in February predicted a “strong possibility” that the central bank would return to multi-price auctions for the new lending calendar, noting the improved conditions compared to 2021.
($1 = 83.3630 Indian rupees)
Tags: Indian cenbank returns multiprice auctions years April
