RBI Tweaks Government Bond Auction Strategy Amid Falling Sales
Vehicles travel past the Reserve Bank of India (RBI) headquarters building during a lockdown in Mumbai.  (Photographer: Dhiraj Singh/Bloomberg).

RBI Tweaks Government Bond Auction Strategy Amid Falling Sales

The Reserve Bank of India has once again been forced to tweak the methodology it uses for government bond sales, as it continues to face a string of partially failed auctions.

On Friday, the central bank said it would move to a "uniform price auction" for benchmark securities of two-year, three-year, five-year, 10-year, 14-year tenor and floating rate bonds. The 30-year and 40-year bonds will continue to be auctioned via the multiple price-based method.

The above arrangement will continue till further review, the central bank said.

Under the uniform price auction, an auction cut-off rate is determined based on bids placed. However, once that cut-off rate is established, securities are allotted to all participants at the same rate. This reduces the volatility in bids. In a multiple price auction, bidders pay the price they bid.

The central bank typically moves to a uniform price auction in times of volatility. It had done so in February when bond yields had moved up. Still, the shift in methodology isn't common and signals dislocation in the market.

In the current scenario, the RBI, which is also the debt manager to the government, has been faced with auctions which have either partially failed to go through or underwriters have had to step in to rescue the sales.

At Friday's auction, more than Rs 10,000 crore in bonds maturing in 2026 were devolved on underwriters.

"The step is a continuation of market intervention to try and manage the bond yields," said Arvind Chari, chief investment officer at Quantum Advisors.

The 10-year is anchored but the other market spreads are indicative of market stress. I hope this is short-term because market-based price auction tends to be much better. So, this is going back on something that has worked very well.
Arvind Chari, Chief Investment Officer, Quantum Advisors

Chari added that while RBI has had success in managing yields, it is trying to manage too many things. "So, they are trying to give out a signal on every market activity. The RBI risks losing market signals and feedback in their maniacal quest to try and keep bond yields at around 6%."

The uniform price method may coax banks to bid at slightly lower yields and help devolvements, Chari explained.

Alongside the change in auction methodology, Bloomberg reported that the central bank has written to primary dealers proposing a framework for defining acceptable bids at auctions, as underwriters are having to step in to rescue more bond sales.

The RBI wants to define any bids that have a spread of more than two basis points from secondary market yields as outliers, the report said, citing people familiar with the matter.

With the uniform cutoff they may coax banks to bid at slightly lower yields and also avoid the issue of devolving due to tail bids in market price auction

Also read: From Forex To Bonds, RBI Faces A Whack-A-Mole Challenge

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