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Our Banking Bureau
Mumbai, Oct 30: The Reserve Bank of India has proposed to replace the existing French auction system for 91-day treasury bills auction with a Dutch auction system which follows the uniform price auction method.
The move is expected depth to the treasury bills segment, increase the number of players, widen the T-bills market and bring about a lower cut-off yield.
Taking a queue from the busy season credit policy announcement, the market bid at a lower rate which pushed the cut-off yield of the 91-day T-bills by 13 basis points to 9.94 per cent as against 10.07 per cent in a auction held on Friday.
"The central bank is trying both the auction systems-French auction and Dutch auction to derive the best results," said an official from STCI.
The central bank is following French auction system for gilts auction and Dutch auction system for the 91-day T-bill auction.
According to market sources, the Dutch auction system will encourage aggressive bidders participation which will further reduce the interestrate and induce the central bank to fix a lower cut-off yield.
Money market experts are of the view that by replacing the French auction system with a Dutch system, the central bank is trying to give a `comfort level bidding' to the non-competitive bidders taking part in the auction.
According to RBI sources, the central bank has resorted to such a drastic measure to encourage bidders participation in the auction. "In the last few auctions, bidders have not actively participated owing to the huge risk of paying a premium. Thus to increase the market participation during t-bills auctions we have changed the auction system," sources closely tracking the issue said.
Money market sources feel by replacing the existing system with a uniform price auction system, the central bank is trying to reduce `the winner's curse' which is holding back active bidders from bidding aggressively.
Under the existing French auction system, bidders have to pay a premium to the central bank which is the difference betweenthe price quoted by the bidder and the cut-off yield fixed by the central bank. "Most players do not want to run the risk of buying the security above par when they can easily buy the security from the secondary market below par or from the RBI sale window at a much lower rate, the very next day," fund managers said.
Under the French auction system the pressure of devolvement during auction falls on central bank. "The payment of premium during the auction system discourages the bidder from biding actively during auctions," said sources at I-Sec.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
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