UDAY bonds not to come up for routine auction or sale process

MUMBAI: UDAY bonds, a bailout scheme for defaulting state power distribution companies run by state governments, will not come up for routine auction or sale process conducted by the Reserve Bank of India on behalf of the states, a move that is seen as easing pressure on bond yields.

``UDAY Bonds, if and when issued as non-SLR state Development Bonds, will not hit the market but will be through private placement,” RBI said in an email reply to ET on surging yields due to such fears. “The Reserve Bank will also consider regulatory relaxations, including classification of these bonds as held to maturity.”

The central bank’s assurance should calm the nerves in bond markets which has been pushing up yields in the past few days expecting a surge in supply of bonds. Investors fear that supply of bonds from both the central government and states will be overwhelming which the markets could not support. Before March ends, Rs 60,000 crore worth of UDAY bonds are expected to be issued while next fiscal year it would be around Rs 30,000 crore. Government bonds maturing in next four year to ten years, mostly yielded 8% or more, the levels seen at the beginning of the last financial year.

RBI as an investment banker to the government and state governments manages the sale of bonds. AT times when the markets turn volatile it also does many tweaks to keep the yields under check.

Under held-to-maturity category, banks need not to show mark-to-market profits. With no secondary market trading opportunity such bonds will not influence yields.