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Informist, Tuesday, Nov. 26, 2024

 

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--PD sources: RBI officials favour less frequent gilt reissues in big chunks
--CONTEXT:RBI officials attended primary dealers' association conference Sat
--PD sources:RBI officials urged to promote participation in retail segment
--PD sources: RBI officials flagged delay in proprietary FX business ops
--PD sources: Discussion with RBI officials routine, on bond mkt development

 

By Aaryan Khanna and Cassandra Carvalho

 

NEW DELHI/MUMBAI – Reserve Bank of India officials at a bond market conference over the weekend batted for auctioning individual government bonds in larger but less frequent tranches, market sources who attended the event told Informist. The eventual plan is to shift to monthly sales of each paper, RBI officials are learnt to have indicated at a conference organised by the Primary Dealers Association of India, hinting at a move towards a US-like auction schedule.

 

"One of the major things that the RBI discussed was the success of the reworked auctions, with each bond being auctioned only once in three weeks," one of the bankers at the event said. "Since the market is able to absorb INR 200 billion, INR 220 billion (in a single bond at auction) and the number of liquid bonds is increasing, the RBI was quite happy in this development."

 

RBI Deputy Governor T. Rabi Sankar was among the central bank officials present in the conference, according to the market sources. The RBI has pushed this point forward in several conversations with market makers in recent months, the officials said. Starting in the Apr-Sept borrowing calendar this year, the RBI and the government shifted the frequency of issuing the 10-year gilt and some other liquid bonds to once in three weeks, from once every fortnight earlier. It retained this plan in Oct-Mar.

 

So far in 2024-25 (Apr-Mar), the RBI has not devolved any auction on primary dealerships despite the bunching up of the supply. A senior finance ministry official had told Informist in April that the government and the RBI were keen to move to monthly issuances to ensure higher secondary market trading, better liquidity and price discovery of securities in due course.

 

"The aim of these is to move to a method like the US does, where a particular bond is issued only once a month," an official at a primary dealership, who attended the event, said.

 

With the increasing size of each auction, the discussion also centred around the need to expand the list of primary dealers in India. The RBI recognises a total of 21 primary dealers, of which seven are standalone, and the rest are attached to banks. 

 

"This is an old point going on for at least few months, if not years, wherein it seems there is keenness on increasing number of PDs (primary dealers)," a third official who attended the meeting said. "As the borrowing size is increased, then you need more participants or given the current participants, the balance sheets to increase so that more borrowing can be done by the issuer without any impact cost. The more liquid the market is, the easier it is for existing primary dealers to take out the risk."

 

In addition to the comment about the auction, the RBI officials also urged primary dealers to promote retail participation in the bond market by offering constant liquidity to participants in the RBI's Retail Direct platform. Launched in November 2021, the platform operates under a request-for-quote system, with institutional market makers instructed by the central bank to offer quotes to retail participants seeking to buy or sell gilts. While retail participants often request small ticket sizes, with odd lots as low as INR 10,000, the smallest regular lot size for gilt trades is INR 50 million and creates a problem for primary dealers, according to market officials. 

 

 

Another point raised by the RBI officials was that no primary dealership had set up proprietary foreign exchange operations, despite the green light from the central bank in October 2022. Some foreign-based primary dealers have shifted their plans to the back burner due to the RBI's strict reporting norms. Meanwhile, domestic primary dealers including PNB Gilts were facing issues setting up the settlement framework for their foreign exchange operations, the officials said.

 

"Nothing went ahead as initially planned on forex," another official who attended the meeting said. "I understand that he (the RBI) had to point it out, but forex in India is not lucrative enough right now for us to fastrack it."

 

The rest of the discussion was routine, and on development of the bond market, the officials said. However, among the primary dealers at the conference, both standalone and those attached to banks, the discussion about the direction of bond yields was not optimistic.

 

Traders were not upbeat that gilt yields will fall sharply, at least until the end of the calendar year. The 10-year benchmark gilt yield has fallen to a low of 6.70% in FY25, and ended at 6.83% Tuesday. The primary dealers didn't see it returning to those levels in a hurry as rate cuts in India have been constantly delayed due to high inflation, and several uncertainties persist on the global front.  End
 

(With inputs from Siddhi Chauhan)

 

Edited by Akul Nishant Akhoury

 

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