Reserve Bank of India changes in gilt auctions seen as sign of stable rates

A couple of moves by the RBI while announcing Friday's auction for government securities (G-secs) has surprised the bond market.

But dealers and analysts said that the indications, taken together, signify that the central bank is expecting a stable interest rate, at least over the next 12-18 months.

On Monday , RBI announced that it will auction another lot of the new 10year paper, 8.40% GS 2024, worth Rs 9,000 crore, making it the second consecutive week of auctioning the same paper. This is probably the first time RBI has decided to auction the same paper over two successive weeks. The central bank has also moved from an uniform price auction to multiple price auction method for this Friday .

Dealers said that the current yield on the new 10-year, which will be the new benchmark rate for the market, is at 8.43% per annum. In contrast, the old 10-year, which was the benchmark till last Friday , is trading at a yield of 8.71%. Ideally , the two benchmarks should not have such a large variation which at present is nearly 30 basis points (100 basis points = 1 percentage point). “With more supply of the new 10-year in Friday's auction, this distortion will be corrected soon,“ a top dealer with a domestic bond house said.

The RBI decision is also expected to increase the lifecycle of the new 10-year gilt and also the current 14-year.

In all likelihood, the next 10year will be introduced only after eight-nine months, dealers said. Usually , RBI introduces two 10-year papers every year to indicate the benchmark rate that it is comfortable with. “If the RBI is extending the lifecycle of a 10-year, it is probably (another) indication that rates will be stable and hence it will not tweak with the benchmark paper,“ the dealer said.

During auctions, usually the central bank also uses the uniform price method which ensures bond buyers get the gilts in the auction at an uniform yield. On the other hand, in multiple price auctions, while bidding bond houses should be more careful about the price they are willing to pay . By changing the bidding method, RBI is indicating bond players to be very careful about rates going forward, bond market players said.