RBI’s switch auction of G-secs stays undersubscribed on tight liquidity

Context: The Reserve Bank of India’s switch/conversion auction of government securities (G-secs) of Rs 20,000 crore remained undersubscribed. as liquidity remained tight and banks demanded higher yields.

Why this trend?

  • The overall liquidity (cash) in the system is stable at a lower level of just about Rs 50,000 crore. There is clearly a strain in the market in terms of liquidity not being evenly distributed and there are shortfalls in the liquidity of some banks. 
  • Switches and conversions have been used to defer payments due in the next couple of years, with the maturities being stretched. This reduces pressure on the market in terms of fresh borrowings being needed.
  • Liquidity (cash) demand of the banking sector was around 1.5 lakh crore, however, it was narrowed down to 80,000 crore. Lower cash with the banking sector left overnight call money rates being pushed above the benchmark level. This led to tightening of liquidity.

About Government Securities

A Government Security (G-Sec) is a tradable instrument issued by Central or State governments. It acknowledges the Government’s debt obligation.

RBI As Debt Manager:

  • RBI Act mandates RBI to undertake receipts and payments of Central Government and carry out banking and management of public debt of Union.
  • State Government transactions are carried out by RBI in terms of an agreement entered by RBI and State Governments under RBI Act. As of now, such agreements exist between RBI and all State Governments except Sikkim.
  • Thus, RBI is banker and debt manager of government.
  • RBI issues both, treasury bills and bonds or dated securities on behalf of Central Government while the State Governments issue only bonds or dated securities, which are called the State Development Loans (SDLs).

Types Of Government Securities:

Short Term Government Securities(maturity less than 1 year)

  • Treasury bills: Money market instruments issued by GoI. Presently, issued in three tenors of 91 days, 182 days and 364 days.
  • Cash Management bills: Issued by GoI to meet temporary mismatches in cash flow of GoI. They are like T-bills but are issued for maturities less than 91 days.

Long Term Government Securities (Maturity more than 1 year):

  • Dated G-Secs: They are securities which carry a fixed or floating coupon (interest rate) which is paid on face value, on a half-yearly basis. Tenor ranges between 5 to 40 years.
  • Fixed Rate Bonds: These are bonds on which the coupon rate is fixed for the entire life (i.e., till maturity) of the bond. Most Government bonds in India are issued as fixed rate bonds.
  • Floating Rate Bonds: FRBs are securities which do not have a fixed coupon rate. Instead, it has a variable coupon rate which is re-set at pre-announced intervals (say, every six months or one year).

Auction Of Government Securities

G-Secs are issued through auctions conducted by RBI. Auctions are conducted on the electronic platform called the E-Kuber, the Core Banking Solution of RBI.

Members of e-KUBER: Commercial Banks, Scheduled Urban Cooperative Banks, Primary Dealers, Insurance Companies and Provident Funds, who maintain funds account (Current Account) and securities account (Subsidiary General Ledger account) with RBI.

All members of E-Kuber can place their bids in the auction through this electronic platform.

Types Of Auctions

  • Rate of interest (coupon rate) gets fixed through a market-based price discovery process.
  • Yield Based Auction: is generally conducted when a new G-Sec is issued. Investors bid in yield terms. Bids are arranged in ascending order and cut-off yield is arrived at the yield corresponding to the notified amount of the auction. The cut-off yield is then fixed as the coupon rate for the security. Successful bidders are those who have bid at or below the cut-off yield.
  • Price Based Auction: is conducted when G-Sec which has already been issued is being reissued. Bidders quote in terms of price per Rs 100 of face of the security. Bids are arranged in descending order of price offered and the successful bidders are those who have bid at or above the cut-off price.

Allocation Of Government Securities

Depending upon the method of allocation to successful bidders, auction may be conducted on Uniform Price basis or Multiple Price basis:

Uniform Price Method: All the successful bidders are required to pay for the allotted quantity of securities at the same rate, i.e., at the auction cut-off rate, irrespective of the rate quoted by them.

Multiple Price Method: Successful bidders are required to pay for the allotted quantity of securities at the respective price/yield at which they have bid.

Types Of Bidding

Competitive Bidding: In a competitive bidding, an investor bids at a specific price/yield and is allotted securities if the price/yield quoted is within the cut-off price/yield. Competitive bids are made by well-informed institutional investors such as banks, financial institutions, primary dealers, mutual funds and insurance companies. Multiple bidding is also allowed, i.e., an investor may put in multiple bids at various prices/yield levels.

Non-Competitive Bidding: To encourage wider participation and retail holding of Government

securities, retail investors are allowed participation on ‘non-competitive’ basis in select auctions of dated G-Secs and Treasury bills (5% of notified amount). Retail investor is any person including individuals, firms, companies, corporate bodies, institutions, provident funds, trusts and any other entity as prescribed by RBI.

RBI’s Retail Direct Scheme:

  • It is a comprehensive scheme which provides a one-stop solution to facilitate investment in Government Securities by individual & retail investors through an online portal. It aims to provide a safe, direct and secured platform to investors.
  • Under this scheme, retail individual investors will be able to open a Gilt Securities Account – Retail Direct Gilt (RDG) Account with RBI, using an online portal (rbiretaildirect.org.in).

Using the Retail Direct Platform, individual investors can participate in 

  • T-Bills
  • Dated G-Sec
  • State Development Loans (SDLs)
  • Sovereign Gold Bonds (SGB)

Investments can be made using following routes:

  • Primary issuance of government securities: Investors can place bid as per the non-competitive scheme for participation in primary auction of government securities and procedural guidelines for sovereign gold bond issuance.
  • Secondary market: Investors can buy and sell government securities on NDS-OM.
  • Using the RDG account, individuals can buy Government Securities in primary market (auctions) and buy/sell in secondary market.

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