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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.

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