Back to normal: RBI puts up long-term govt bonds for sale

Saikat Das
moneycontrol.com

The Reserve Bank of India (RBI) will put up four government bonds of different tenures and interest rates for sale to raise Rs 15,000 crore on August 08, 2013. Unlike the previous auction announcement, the central bank apparently brought back normalcy by including some long-term securities.

The securities offered for the proposed auction include the papers offering 8.12 percent coupon and maturing in 2020; 8.33 percent in 2026; 8.32 percent in 2030 as well as 8.30 percent in 2042. This is in contrast to the bonds offered for sale in the auction dated July 26, 2013.

Back to normalcy….

"This is the normal RBI auction schedule and nothing unusual," Mahendra Jajoo, Chief Investment Officer (fixed income) at Pramerica Asset Managers told moneycontrol.com.

"Earlier, the central bank had included short term papers like 2015. Now, they turned to the mechanism of cash management bills to manage short term liquidity without too much changes in regular borrowing calendar. There has been good demand from insurance and pension funds for long term bonds," he said.

Bonds included in July auction

Four bonds which were put up for auction last time, were the sovereign securities offering interest rate of 7.38 percent and maturing in 2015; 8.12 percent in 2020; 8.20 percent in 2025 as well as 8.32 percent in 2032.

The basic purpose for introducing short-term papers, according to bond traders, was to influence short term liquidity. RBI had never wanted long term interest rates to spike as it would hurt country's growth.

What is Cash Management Bill (CMB)?

It is a kind of short-term debt market instrument, which can be issued by the Union government only for maturities of less than 91 days. For the last couple of weeks, the RBI has been conducting auctions for CMBs. On Monday itself, it mopped up Rs 3,000 crore through seven-days CMB with a cut-off yield at 9.926 percent.

Attractive cut-off yield

According to Arvind Konar, head of fixed income at Almondz Global Securities, the RBI is now looking at long term bonds, wherein the cut-off yields are expected in the range of 8.50 – 8.70 percent.

"Even though short term rates are high, these latest sovereign securities would find good demand from banks, which are mostly not experiencing pick-up in credit expansion. Hence, lenders may use their funds parking on securities with attractive yields," Konar said.

Yield, which is not the same as interest or coupon rate, is the total interest income on a particular security.

Some of the relative short-term bonds are currently trading with reasonably higher yield. For example, the paper offering 7.49 percent coupon and maturing in 2017 on Monday was traded at a yield of 8.70 percent in the secondary market. Similarly, the 7.17 percent in 2015 was last traded at yield of 8.86 percent.

Cut-off yield

On every auction, RBI declares a cut-off yield, above which auction participants are not allowed to quote.

saikat.das@network18online.com