The Reserve Bank of India has again been forced to change the methodology it uses for government bond sales as it continues to face a series of partially failed auctions.
On Friday, the central bank said it would move to a “flat-price auction” for benchmark two-year, three-year, five-year, 10-year, 14-year and floating-rate bonds. The 30 and 40 year bonds will continue to be auctioned using the multiple price method.
The above arrangement will continue until further consideration, the central bank said.
In the flat-price auction, an auction closing rate is determined based on the bids placed. However, once this cut-off rate is established, the titles are awarded to all participants at the same rate. This reduces the volatility of offers. In a multiple-price auction, bidders pay the price they bid.
The central bank usually switches to a flat-price auction in times of volatility. He had done so in February when bond yields rose. However, the change in methodology is not common and signals a dislocation of the market.
In the current scenario, the RBI, which is also the manager of the debt to the government, was faced with auctions that either partially failed or underwriters who had to step in to save the sales.
In Friday’s auction, over 10,000 crore rupees of bonds maturing in 2026 were vested in policyholders.
“This step is the continuation of market intervention to try to manage bond yields,” said Arvind Chari, chief investment officer at Quantum Advisors.
Chari added that although RBI has been successful in managing returns, it tries to manage too much. “So they’re trying to give a signal on every activity in the market. The RBI risks losing market signals and commentary in their manic quest to try to keep bond yields around 6%.”
The uniform price method can encourage banks to bid at slightly lower yields and facilitate decentralizations, Chari explained.
Along with the change in auction methodology, Bloomberg said the central bank wrote to primary traders to offer a framework for defining acceptable bids at auction, as underwriters must step in to save more bond sales.
The RBI wants to define as outliers any offers that have a deviation of more than two basis points from secondary market returns, the report said, citing people familiar with the matter.
With the uniform denomination, they can induce banks to bid at slightly lower yields and also avoid the devolution problem due to extreme bids in market price auctions.