■RBI changes G-Sec Auction Methodology
✅RBI has been decided that benchmark securities of tenor 2-year, 3-year, 5-year, 10-year, 14-year tenor and Floating Rate Bonds (FRBs) will be, henceforth, issued using the uniform price auction method
●Government security (G-Sec):
✅These are debt instruments issued by the central government or state governments to borrow money.
Two categories:
✅1. Treasury bills (T-Bills) – short-term instruments which mature in 91 days, 182 days, or 364 days, and
✅2. Dated securities – long-term instruments, which mature anywhere between 5 years and 40 years
✅The central government issues both treasury bills and bonds or dated securities
✅The State governments issue only bonds or dated securities, which are called the state development loans.
✅There is no risk of default, and hence, are called risk-free gilt-edged instruments.
✅FPls are allowed to participate in the G-Secs market within the quantitative limits prescribed from time to time.
✅lts price fluctuates in the market.
●Factors affecting its prices:
✅Changes in interest rates in the economy
✅Demand and supply of the securities
✅Policy actions by RBI like change in repo rates, cash-reserve ratio and open-market operations
✅Due to fluctuation in other markets like money, foreign exchange, credit, and capital markets.
✅Developments in international bond markets
■Auction Methods:
●Price Based Auction:
✅A price based auction is conducted when Government of India re-issues securities issued earlier.
✅Bidders quote in terms of price per Rs.100 of face value of the security (e.g., Rs.102.00, Rs.101.00, Rs.100.00, Rs.99.00, etc., per Rs.100/-). tBids are arranged in descending order and the successful bidders are those who have bid at or above the cut-off price.
✅In a Uniform Price auction, 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.
✅In a Multiple Price auction, the successful bidders are required to pay for the allotted quantity of securities at the respective price/ yield at which they have bid.
●Yield Based Auction:
✅It is generally conducted when a new Government security is issued. Investors bid in yield terms up to two decimal places (for example, 8.19 per cent, 8.20 per cent, etc.).
✅Bids are arranged in ascending order and the cut-off yield is arrived at the yield corresponding to the notified amount of the auction.
✅The cut-off yield is taken as the coupon rate for the security. Successful bidders are those who have bid at or below the cut-off yield.
✅Bids which are higher than the cut-off yield are rejected
SOURCE – PIB
