RBI conducts last bond auction before current financial year ends

The Reserve Bank of India (RBI) on Friday conducted the last bond auction of the current financial year. 

The government borrowed Rs 80 billion through the benchmark 10-year bonds and Rs 30 billion through a floating rate bond. The 10-year bonds have ready takers but floating rate bonds, or floaters, have generally low demand and are rarely-used instruments. 

Since the government borrowed through floaters, the interest rate is likely to rise in the near term. 

“When interest rate is on the rise, investors do not want to get stuck with a fixed coupon rate. That is when floaters are issued. The issuer incurs a little bit of cost, but the issuance goes through,” said Harihar Krishnamurthy, head of treasury at First Rand Bank.

According to the RBI and the government, even though inflation will rise in the first half of the next financial year, the second half will see falling prices. This will cool down interest rates. Therefore, issuing a floater might not be risky for the government, while the investors can take comfort in the perceived insurance against adverse yield movement. Typically, the coupon rate of floaters is reset in six months

Since December, the government has cancelled auction of about Rs 260 billion. The move came after talks of extra borrowing surfaced. The amount was higher than the revised extra borrowing target of Rs 200 billion. Before the auction was cancelled, yields were up at 7.60 from about 7 per cent in December. 

The government is yet to notify whether those cancelled auctions would be revisited for the remainder of the financial year, but most of the bond market does not expect it to happen. So, yields may remain stable and below 7.50 per cent for the rest of FY18. The government is expected account for the extra borrowing through short-term treasury bills, mostly with a maturity of 91 days. 

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