Mumbai, Aug 17: The new underwriting scheme for primary dealers (PDs) introduced by the Reserve Bank of India (RBI) last month has failed to encourage the dealers participation in short-term treasury bills auction. At the last week's auctions of 14-day and 91-day treasury bills, the apex bank was left with no choice but to initiate a rescue operation by taking devolvement on itself under tight money market conditions.According to sources closely tracking the money market, replacement of the stand-by system (French) of underwriting by firm system (Dutch) has put the RBI in a tight corner as the pressure of devolvement falls on the central bank. The central bank also incurs losses as it has to pay commission to the primary dealers for underwriting the auction.
At the 14-day treasury bills auction held on August 14 for a notified amount of Rs 500 crore, devolvement on RBI was to the tune of Rs 25 crore. While at the 91-day treasury bill auction, Rs 160 crore devolved on RBI out of a notified amount of Rs400 crore.
For the 14-day T-bills auction, RBI received seven competitive bids worth Rs 525 crore, out of which it accepted six bids worth Rs 475 crore. For the 91-day treasury bills, RBI received five competitive bids worth Rs 240 crore and one non-competitive bid worth Rs 100 crore.
According to money market sources, under tight liquidity situation, the risk of devolvement will fall on RBI. "If the RBI decides to give 50 per cent of the issue for underwriting under tight liquidity conditions, PDs may find it difficult to mobilise funds and therefore settle for devolvements. This way they can save on the premium cost to be paid to the central government," said a market source.
RBI has also kept the premium clause unchanged in the new scheme. As per the scheme, bidders bidding for the auction will have to pay a premium to the central government in case the coupon quoted by them is lesser than the coupon rate fixed by RBI.
"The new scheme will discourage the primary dealers from bidding activelyduring government securities auctions," said a market source.
Market sources feel that the new underwriting scheme will be advantageous to PDs as they will get double benefit from the government by way of underwriting commission and shifting the risk of devolvement to the central bank. "PDs not bidding at the auction will get security on par in case of a devolvement, shift the devolvement risk to the central bank and still collect the underwriting fee," said a market source.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
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