RBI Looks to Man­age Re­demp­tion Pres­sure with 14-year Is­sue

Paper likely to find favour with in­vestors as dif­fer­ence with bench­mark is 4-7 bps

The Economic Times - - Markets & Finance - SAIKAT DAS

For the first time this year, the Re­serve Bank of In­dia has in­tro­duced a new 14-year se­cu­rity in its weekly govern­ment bond sale due on Fri­day as it tries to re­duce fu­ture re­demp­tion pres­sure af­ter size­able is­sues.

The yield for the paper ma­tur­ing in 2027-28 is trad­ing at 8.74% in the When Is­sued (WI) mar­ket – an RBI plat­form for price dis­cov­ery with­out set­tle­ment – com­pared with 8.70%, the clos­ing level on Wed­nes­day in the 10-year bench­mark. The spread, or gap, nor­mally re­mains at about 20-30 ba­sis points. A ba­sis point is 0.01%.

“This paper (14-year) will find favour from in­vestors as demon­strated by the When Is­sued mar­ket, which shows only 4-7 bps yield dif­fer­ence with the bench­mark se­cu­rity,” said Ni­rakar Prad­han, chief in­vest­ment of­fi­cer at Fu­ture Gen­er­ali In­dia Life In­sur­ance. “The spread (con­trac­tion) alone sug­gests the ris­ing de­mand. Due to its likely liq­uid na­ture, in­vestors would buy them.”

The cen­tral bank will sell the new bond for .` 7,000 crore in the auc­tion due on May 30 (Fri­day). Un­der nor­mal cir­cum­stances, it will put the se­cu­rity on the block ev­ery al­ter­na­tive weekly auc­tion.

The 10-year bench­mark govern­ment bond too is due for re­place­ment, but deal­ers ex­pect it to hap­pen only by June-end or July as is­sues have reached about .` 62,000 crore. As a thumb rule, the Re­serve Bank is­sues a new bond with a dif­fer­ent ma­tu­rity when the in­cum­bent is­sues cross .` 70,000-80,000 crore. “Mar­ket is ex­cited to have a new paper to trade for the first time in 2014-15,” said Amit Tri­pathi, chief in­vest­ment of­fi­cer - fixed in­come in­vest­ments, Re­liance Mu­tual Fund. “More par­tic­i­pants are likely to trade in this se­cu­rity as is­suances rise in com­ing auc­tions, mak­ing it liq­uid.” Cur­rently, the govern­ment bonds ma­tur­ing in Fe­bru­ary, Au­gust and Septem­ber, 2027, are sig­nif­i­cantly higher. On be­half of the govern­ment, RBI has sold bonds car­ry­ing 8.24% coupon worth .` 93,388 crore while it is .` 73,427 crore for bonds with 8.26%. The cen­tral bank has is­sued Rs 89,252 crore for 8.28% notes. All those bonds were is­sued in 2007. Cu­mu­la­tively, the govern­ment will face .` 2,56,067 crore bond re­demp­tions in 2027 and .` 2,71,068 crore in 2027-28. Grad­u­ally, all of them will turn off-the-run or illiq­uid­ity se­cu­ri­ties, deal­ers said. Since Tues­day, to­tal daily vol­ume has been hov­er­ing around 50-80 crore in WI mar­ket for the new se­cu­rity com­pared with 90100 crore each in the ex­ist­ing se­cu­ri­ties ma­tur­ing in 2027. In WI, trad­ing set­tle­ment of trades hap­pens only two days af­ter the for­mal is­suance of the paper. This is due on June 2 in this case. “So far, in­vest­ment op­tions are not di­verse…thanks to limited is­suances. Due to our monthly pre­mium in­flows that keep com­ing, we find cen­tral and state govern­ment se­cu­ri­ties the safest bet to in­vest. If there's a new long-term paper in the mar­ket, we would take in­ter­est in it,” said a se­nior of­fi­cial from a large in­sur­ance house. “People will trade on the new se­cu­rity af­ter it gets in­cluded in the next few auc­tions, which will help re­tain the crit­i­cal mass,” said NS Venkatesh, ex­ec­u­tive di­rec­tor, IDBI Bank.

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