RBI regresses to multiple price method for bond auctions
The RBI will revert to the Multiple Price method for bond auctions on August 1, 2014, a year after it adopted the present method of Uniform Price.
On August 1, 2014, the central bank will auction a 10-year bond with a coupon rate of 8.40% for a notified amount of Rs 9,000 crore using this method. Two more bond auctions for a total of Rs 5,000 crore will be conducted on the same day.
Bond auctions could be classified as either Uniform Price-based or Multiple Price-based.
- In the Uniform Price-based, all successful bidders are required to pay for the allotted quantity of securities at the same rate, the auction cut-off one, irrespective of what they’d quoted.
- In a Multiple price auction, the successful bidders are required to pay for the allotted quantity at the respective price or yield at which they bid.
It was in June 2013 when RBI adopted the uniform price method, when bond yields were volatile, with foreign institutional investors leaving the domestic markets amid a dwindling currency. However, the macro fundamentals have improved since September2013, with the rupee stabilizing after recovering most of the losses. A new government at the Centre has reestablished hope among foreign investors. It is expected to speed up the opening to foreign investment and control the fiscal deficit. The fiscal deficit for the current financial year is targeted at 4.1% of GDP, as compared to 4.5% in 2013-14. The recent Union Budget set the target at 3.6% for 2015-16 and 3% for 2016-17.
Using a different method RBI would also be able to observe how the market reacts to different methods of auction.