Multiple price auctions show confidence in g-sec demand

Mumbai: The Reserve Bank of India’s (RBI) decision to revert to the multiple price method for auctions of sovereign bonds after three years signals confidence on the part of the Centre and its debt manager about New Delhi’s fiscal management, with the first such debt sale validating that trust.

The multiple price auction method was suspended by the RBI for most debt auctions in July 2021 amid severe market volatility due to sharp increases in government borrowing during the COVID crisis. While the method encourages deeper price discovery for bonds, it can result in higher cost of borrowing for the issuer – the government in this case – when market conditions are adverse.

Going by the demand at Friday’s inaugural central government bond auction for FY25, the Centre is on a much stronger footing now as its adherence to fiscal consolidation, moderating inflation, and anticipation of overseas flows due to index inclusion have added lustre to gilts.

On Friday, the RBI conducted an auction of government bonds worth ₹38,000 crore, kicking off the Centre’s ₹14.1 lakh crore borrowing programme for FY25. The bond sale received competitive bids – which are those from institutional players – worth a massive ₹1.2 lakh crore, resulting in a bid-cover ratio of 3.2 times. A bid-cover ratio above 2.5 is generally viewed by market participants as a sign of healthy demand at a bond auction.

“The markets have changed. From the time when sentiment was bearish and there were auction devolvements to now when things are moving very smoothly. The jury is out about which method is better but in a bad market, the uniform price method gets a better (lower) yield for the issuer,” said Vikash Goel, MD, PNB Gilts.

“In the multiple price method, the price discovery is sharper and clearer. The essential information you get about where the market is, what market participants think individually does not come through in the uniform price method,” he said.The return to the multiple price method from the more straightforward uniform price method that the RBI brought back in 2021 suggests that the central bank is prepared to weather any storms that may arise in a globally volatile market environment.In the uniform price method – in which all bond investors receive securities at the same price regardless of where they placed bids at an auction – market volatility is smoothened.

In a multiple price auction, investors received bonds at the price levels they have bid for. This means that a buyer runs the risk – referred to as the ‘winners curse’ – of ending up purchasing bonds at a much higher price than the prevailing market price if bids are not made judiciously.