The Reserve Bank of India (RBI) on Friday, came out with results of the bond auction to raise Rs 15,000 crore by selling soverign four securities. However, there was a devolvement on primary dealers (PDs) to the tune of 1,330 crore on two papers carrying interest rates of 8.12 percent maturing in 2020 and 8.32 percent in 2032. But it was lower than the market expectations.
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What is devolvement?
In simple terms, devolvement means, unsold bonds. The central bank rejected some bids where investors quoted beyond the RBI's cut-off yields pegged at 8.6747 percent and 8.5747 percent for those two bonds. PDs, which are authorized by the RBI to underwrite (a form of guarantee to sell) such bond issues, will sell the devolved bonds, perhaps at a cheaper rate. In turn, they earn commission from the apex bank.
Which bonds not devolved?
The other two papers where there were no devolvement included government bonds carrying coupon sizes of 7.38 percent maturing in 2015 and 8.20 percent in 2025. In the previous auction, bonds of around Rs 3,500 crore were devolved for similar notified amount of Rs 15,000 crore.
Reason for not being sold
"RBI wants a liquidity squeeze in the shorter term but not in longer tenure," Arvind Konar, head of fixed income at Almondz Global Securities told moneycontrol.com.
"The devolvement suggested that it was not comfortable with higher yields on the longer maturity bonds. Hence, it allowed devolvement. The amount was lower than the market expectations," he said.
According to Jitendra Arora, senior vice president (investments) at ICICI Prudential Life Insurance, there is nothing unusual in this devolvement.
"The change of composition in the bond auction buckets from too longer to long paper had its effect. Longer term papers have failed to garner the required response. It was about Rs 959 crore in 2032 maturity as compared with Rs 371 crore in 2020,” Arora said.
Why did RBI change the composition?
The disappointment over significant devolvement (Rs 3,500 crore) in the last auction actually prompted the RBI to tweak its strategy. In the latest auction, the central bank has altered the composition of securities it had to put up for sales.
The strategy was seen as an attempt by the RBI to not allow long-term rates go up. Long term rates have a direct correlation on the economy, impacting cost of funds for companies, and individual loans in housing and auto sectors.
Latest auction: Bid details
During the July 26 auction, the RBI has received 116 and 100 competitive bids respectively for those two papers while it has accepted only 44 bids worth Rs 2,612 crore and 20 bids worth Rs 2,020 crore.
Competitive bids constitute major share of bond auctions wherein the institutional investors and PDs participate. In non-competitive bids, retail investors and some co-operative banks join.
Under non-cooperative bids, two papers received just 10 and seven bids respectively for just about Rs 37 crore.
Other reason & the PD role
According to a senior official from a large PD, short term rates have gone beyond 11 percent in the Cash Management Bill (a government security termed as T-bill). This too may have impacted devolvement.
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“In the 2020 category, some investors influenced by higher T-bill rates, might have bid at a higher rate. However, RBI strictly will not allow long term rates to go up. Hence, it rejected such bids. We will now have to sell those devolved bonds in the market at a discount. Government bonds will always find some demand,” the person said on conditions of anonymity.
It is learnt that the government has substantially increased PDs’ commissions, who would be earning close to Rs 1 crore for every Rs 100 crore bond sales.
Wrap-up of key money market indicators
Meanwhile, the yield on the 10-year benchmark bond 7.16 percent maturing in 2023 fell marginally to close at 8.16 percent on Friday compared with the previous close of 8.19 percent. The weighted average three-day call money rate shot up to 10.01 percent as against 8.32 percent on Thursday in the inter-bank money market.
In the last couple of weeks, the RBI issued a series of liquidity tightening measures to halt the rupee’s free fall against the US dollar. It will announce its first quarter (April-June) credit policy on July 30.