Less volatile bond markets eat into primary dealers' earnings as underwriting commissions drop

Bonds

Primary dealers, who underwrite government securities, have earned less commission in the financial year 2024-25 due to subdued volatility in the bond market, and lower risk of devolvement, or a potential loss due to obligated purchase of unsold securities of an issue due to under-subscription

According to the Reserve Bank of India’s (RBI) Annual Report 2024-25, commission paid to primary dealers including GST, for underwriting primary auctions of dated government securities during 2024-25 was Rs 15.8 crore as compared with Rs 48.5 crore during 2023-24.

Money market experts said the commission was sharply lower as primary dealers in most auctions have quoted less fee of underwriting.

Primary dealers usually underwrite the government bond auctions against a commission. This fee charged by primary dealers, though small, reflects the sentiment of the market.

If there is expectation that the market would demand higher yields for buying government bonds at weekly bond auction, which RBI is unwilling to pay, then the primary dealers would charge higher commission fee on bonds for underwriting.

There were two instances of devolvement on primary dealers during 2024-25 as against zero in the previous year.

There was one instance each of rejection of all bids for a notified amount of Rs 6,000 crore, and partial acceptance of bids for Rs 1,695 crore as against the notified amount of Rs 6,000 crore, as per RBI’s report.

Yield on the government securities softened 45 basis points in FY25 due to various factors such as decline in inflation, expectation of monetary policy easing, continuation of fiscal consolidation, RBI’s liquidity injection, increased foreign portfolio investors (FPI) investments aided by inclusion of Indian government securities in global bond indices, fall in crude oil prices and start of monetary easing by major central banks.

During Q1FY26, government securities yields shown a two-way movements, initially rising at the beginning of the quarter amid FPI outflows and higher oil prices, but softened thereafter in the wake of record surplus transfer by the RBI to the central government, FPI buying ahead of bond index inclusion and a drop in crude prices.

After this, the yields have seen a downward movement due to better demand from overseas investors, and domestic investors such as pension funds, EPFO, insurance companies, among others.