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Commentary

IIB Auction Fails: No Bids Accepted

Remember Inflation Indexed Bonds?

They’re back.

Oh, wait, they’re not.

RBI thought they’d sell 1,000 cr. of bonds today. They even got underwriters and will pay them Rs. 9.8 cr. for the privilege. And they got bids, oh, they got some serious bids, for upto 2,000 cr.

But they really didn’t like what they saw, so they decided not to accept any bids.

imageAnd they, being such nice guys, didn’t even let the auction devolve on primary dealers!

This is the problem in having the bank regulator work as the merchant banker for the government.

  • You can’t hurt the banks that are the primary dealers and underwriters by letting the auction devolve (Bank regulator problem)
  • You will still pay the underwriting fee because you’re a nice guy (banks are your friend)
  • You can’t accept the bids because then interest rates are too high and this would send a wrong signal (Monetary policy issue)
  • And you can’t create a deep liquid market by letting everyone participate in the market, removing the silly “SGL” requirements and merging it with demat modes, and letting market exchanges handle fixed income (okay, this one’s specific to RBI).

We really need to have a crowbar separation between all these roles. Note: My conjecture is just based on a hunch; the real reason may be well different. However, having to wear multiple hats muddies RBI’s role in the process.