The cut-off yield on government securities in the initial two to three auctions is likely to remain lower due to the announcement of the multiple price auction method by the Reserve Bank of India (RBI) and higher demand from investors, experts said.
On April 1, the central bank announced that all auctions of government securities under the market borrowing programme of the government of India would be conducted using the multiple price method.
In a multiple price auction, buyers are allotted bonds at the price they bid at, while uniform pricing means bonds are sold at the cutoff level.
Nagesh Chauhan, Head – DCM, Tipsons, said that in the multiple price auction method, bidders above the cut-off get securities at their bid rate, which is popularly known as Winner's Curse. This will lower funding costs for the Government steadily, going forward.
Further, Mataprasad Pandey, Vice President, Arete Capital Service, said the weighted average yield during the G-sec weekly auction will come down as now all bidders with bid prices above the cut-off will be accepted at their respective bid prices, unlike under the uniform price auction method.
At Rs 7.5 lakh crore, the scheduled first-half borrowing of the central government amounts to 53.08 percent of the full-year estimate, the finance ministry said in a statement on March 27.
The Interim Budget for 2024-25 had pegged the Centre's full-year gross borrowing estimate at Rs 14.13 lakh crore from the markets.
The first auction as per the calendar will be held on April 5. The auction will be worth Rs 38,000 crore and the central bank will auction 3-, 10-, and 40-year securities.
Also read: Foreigners flocking to Indian bonds make a splash across markets
Overall government borrowing cost
Money market experts are of the view that in financial year 2024-25, the overall borrowing cost of the government is likely to be on the lower side due to demand from foreign investors after Indian bonds were included in the global bond index, multiple price auctions and expectations of a rate cut in the latter part of the year.
“The cost of borrowings will majorly come down due to factors like lower government borrowing and bond inclusion inflows. Multiple Price Auction method may help it lower marginally,” Pandey said.
Debt investments by foreign investors have risen sharply since the first announcement about the inclusion in September 2023, and since last November, monthly investment by these entities in the Indian debt market has remained above Rs 10,000 crore.
Apart from this, investments by these entities in Indian government securities through the Fully Accessible Route (FAR) has also seen a sharp surge of over 100 percent since the announcement.
FAR enables non-residents to invest in specified government of India dated securities without any investment ceilings.
Chauhan added that fresh inflows from FPIs are expected to play a role in reducing overall yields below 7 percent in the coming months, particularly considering the demand for securities in the FAR segment, where FPIs are permitted to invest.
“Since different investors will get the same stock at different prices, there will be active trading in the secondary market, which will also enhance the price discovery and benchmarking for the next auction,” Chauhan added.
Also read: Reserve Bank of India reverts to multiple price auctions after 3 years
Devolvement on the horizon?
Experts are of the view that the G-sec auctions will see a devolvement when there is a significant gap in the market pricing and the RBI’s expectations.
Devolvement refers to a situation where a security or debt issue is undersubscribed, forcing underwriters of bonds, mostly primary dealers, to buy the unsold bonds.
“We may see the possibility of devolution when there is a significant gap between market's and RBI expectations,” Pandey added.
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