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Amid foreign investors pulling out from the debt market and lacklustre response from retail investors, the auction of the second tranche of inflation-indexed bonds (IIBs) sailed through.
The Rs 1,000-crore auction of the 10-year IIB maturing in 2023, conducted by the Reserve Bank of India (RBI) on Tuesday, received bids aggregating twice the issue size against four times in the first auction.
The cut-off price for the auction was fixed at Rs 95.10 with a yield-to-maturity of 1.98 per cent, according to RBI data.
In the secondary market, the newly issued bonds closed lower at Rs 94.90 with a yield of 2.01 per cent, said a dealer with a public sector bank. Bond prices and yields move in opposite directions.
With the wholesale price index (WPI)-based inflation at 4.7 per cent in May, the effective interest rate for these would be 6.68 per cent.
The RBI received 81 competitive bids worth Rs 2,388 crore from wholesale investors, of which 42 bids (Rs 997.70 crore) were accepted as compared to 167 competitive bids worth Rs 4,616 crore in the first auction with 26 bids being accepted (Rs 985.94 crore).
The cut-off yield for the first auction, conducted on June 4, was fixed at 1.44 per cent.
However, the response from retail investors remained subdued with two bids worth Rs 2.30 crore. In the auction, the RBI had reserved 20 per cent of issue size of Rs 1,000 for the non-competitive bidding segment.
Waning interest
“The interest of foreign institutional investors is waning from the emerging markets. Investors have started playing it safe after the US Fed announcement, which raised expectations of a rise in the US interest rates and therefore the offer here is not lucrative enough at this point in time,” said Vishal Narnolia, Research Analyst, SMC Global Securities.
According to a treasury official with a public sector bank, “There is not much demand in the bond market at present. However, gradually we will see a shift to the inflation-linked bonds. On redemption, the investor will get a better price than the average government bond.”
“We must start marketing it, beginning with high net worth individuals, so that the bonds gain acceptance among retail investors. This will prove to be a good substitute for gold. Also, the IIBs will be profitable even if inflation comes down,” the official added.
Bond dealers said the retail investors would look at the yield trend and then decide on participating in subsequent auctions for such bonds, they added.
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