MUMBAI, May 7: Friday's five-year, Rs 3,000 crore government bond auction is likely to devolve on the Reserve Bank of India and the primary market dealers because banks are seen bidding at higher coupons ranging between 12.65 and 12.80 per cent, fund managers said.

The devolvement is expected to be in the range of 30-40 per cent of the Rs 3,000 crore notified for the auction.

The RBI on the otherhand, will prefer a devolvement to keep interest rates lower. ``There has to be differential rates of interest between a five-year bond and a ten-year bond,'' said a senior official at a large state-owned bank.

``If the coupon will be above 12.5 per cent where will the RBI price the intermediate maturities,'' he added. ``The RBI will not like the yield curve getting skewed and so the coupon on the five-year bonds will be between 12.5 and 12.6 per cent,'' said another chief dealer at a private-owned bank. The coupon on the new bonds is expected to be at least 50 basis points lower than the 13.05-per cent awarded on 10-year bonds auctioned on April 21. But market players are likely to bid at higher coupons this time for two reasons: one, the yields on the 10 year, 13.05-per cent government bonds have now risen in the secondary market after the overnight interest rates tightened last week from below one per cent to as high as 10.5 per cent. Second, buyers of the 13.05-per cent, state government bonds issued on April 30 are now saddled with excess bonds as they were unable to sell these bonds owing to the steep fall in the prices. These bonds are now trading slightly below its par value of Rs 100.

Many banks took a cue from the 10-year central government bonds that were auctioned which depreciated (in yield) immediately after being listed on the National Stock Exchange. Prices in these bonds appreciated by Rs 1.95 within three days after they were auctioned on April 21.

Banks that weren't successful at the auction went for the 10 year, 13.05-per cent state government bonds that were put on sale by the RBI on April 30 and took large trading positions. This led to the tightening of the overnight rates because Rs 5,381 crore went toward payments of these bonds. The notified Rs 2,500 crore worth of bonds offered on sale was oversubscribed and the entire oversubscribed amount of Rs 2881.14 crore was retained by the RBI leading to the crash in the secondary market prices of government securities and a rise in the overnight rates.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.