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Fixed Income

Another Devolved G-Sec Auction, of 1,330 cr.

Now we’ve seen two weeks of devolved government bond auctions, this time 1,330 cr. has to be underwritten by primary dealers. Every week, RBI helps the government sell bonds of various maturities, and primary dealers (largely banks) intermediate the sale. They will also have to underwrite the sale, in that if enough bids do not come at the cut-off price (i.e. the auction “devolves”"), the primary dealers have to pay up and take the stock.

As I’d noticed, the last two auctions saw a huge spike in underwriting costs, with commissions demanded at 200x of earlier values. (The commissions are bid for every week)

The friday’s auction devolved to the extent of 1,330 cr. taking the total for FY 2013-14 to 4,800 cr. Not entirely acceptable were the 2020 bond (cut-off: 8.67%) and the 2032 bond (cut-off: 8.57%)

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If this continues, the RBI might have to ease off from it’s measures, or have the government pay substantially higher rates on debt.

  • PolicyParalysis says:

    Dear Deepak,
    As I read from an article in BS –
    “There was devolvement in the 8.12 per cent 2020 government bond worth Rs 371.03 crore and in the 8.32 per cent 2032 government bond worth Rs 959.25 crore for which the cut-off yield were 8.6747 per cent and 8.5747 per cent respectively”
    Can you please explain how RBI bond auction works ?

  • Ramamurthy says:

    In simple terms is this how the system work
    1.Govt wants to sell bonds.So i suppose they have already purchased it earlier
    2.RBI will do this for the Govt.I assume they get a commission for doing this? or is it free?
    3.Naturally Govt will want a higher price than what they paid earler.
    4.Govt will tell RBI in advance.Look guys I want this price.
    5. These bonds are under written. So the Govt gets their money less underwriting commission whether the bonds are sold or not.(I understand partial under writing is allowed )
    6. The bonds go for auction
    7.Banks and Traders submit their bids.
    8.If these prices are same or above the price which Govt. wants.No problem.But Govt have to pay the under writing costs.

    • Govt ISSUES these bonds. They didn’t buy it earlier. It’s the government’s own bonds. I need to make a post on this.
      RBI is the merchant banker. They do it for free.
      Bond underwriting means if no one bids, the underwriters buy. That’s the concept of underwriting. If the auction is not accepted at all, and the underwriters don’t have to buy, then what is the underwriting they have done? Free fees only.
      If the govt wants a price, they can tell that price to the underwriters. But in this case bids were submitted at a certain yield that I think would have sent the wrong signal (why else will RBI reject?). That’s why they’ll pay the underwriters, but they should have forced them to buy at a certain yield anyhow. Otherwise this is a shady managed market…