Mumbai, July 24: The Reserve Bank of India on Friday indicated that it wants to correct the distorted yield curve in the primary market. It hiked the yield of the nine-year paper to 12.16 per cent from 11.90 per cent on Friday, sending out a signal that it wants rates in the longer term to move northward. In a price list issued on Friday, the RBI pegged the price of the 13.05 per cent at Rs 104.69.The yield curve in the primary market became distorted on Thursday after the RBI fixed the coupon of the six-year paper higher than the nine-year paper in the primary market. The RBI had set cut-off yields of 11.95 and 12.22 per cent, respectively, for its six- and 10-year bonds auctioned on Thursday compared with 11.50 per cent for the six-year paper auctioned in May and 12.10 per cent for the 10-year bonds auctioned in June. The coupon of the nine-year paper auctioned on May 27 was pegged at 11.90 per cent.
"It looks like the RBI needs money. It has attractively priced the security and it looks like that itwill sell as there are no problems as far as liquidity in the system goes," a debt market analyst in a leading domestic brokerage house said.
The RBI has issued stocks to the tune of Rs 10,000 crore of the 13.05 per cent paper maturing in 2007. It had issued this security by converting one stock maturing last year and auctioned another. Out of Rs 10,000 crore, the RBI sold Rs 3,400 crore through the open market operations last year. "It has to sell another Rs 6,500 crore. This security was a market favourite in the beginning of the financial year and is traded widely. However, as no deals are taking place beyond three to four years, this security is not being dealt," a dealer in a public sector bank said.
In the last fortnight, the RBI mopped up Rs 1,500 crore through open market operations and is looking to mop up further long-term funds through the 13.05 per cent 2007 security.
"Since the RBI gave in to higher yields at the auction and offered higher yields at its sale window, other six-year bondprices should fall in line with those yields," he said.
Dealers said they expected a fresh auction or a tap stock issue of the devolved security soon to mop up funds being released into the system on July 31. "There might be an auction too on July 31," a dealer said.
"Around Rs 3,200 crore is being released on account of maturities of treasury bills and the 13.62 per cent 1998 bonds, besides coupon payments on other bonds," a dealer said.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
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