The rejection of PIB auction bids by the cash-strapped government, which was once seen as a rare happening, now appears to be frequent tale. For the third time in a row, the government has rejected the whole lot of bids put forth by the dealers.
The PIB auctions on March 13, 2013, were held for a targeted amount of Rs.25 billion. However, the unfortunate government couldn’t fetch a single penny out of the scene. This, however, doesn’t signify a lack of interest on the façade of market participants as bids amounting to Rs.32.76 billion were received in the auction, signifying a participation-to-pre-auction target ratio of 1.31 as against the ratio of 0.51 in the last auction held in February. This illustrates that the lazy bankers remain wary of the private sector and in the quest to keep their infection ratios low, swarmed the PIB auctions like bees on the candy floss.
However, the bankers are not so lazy that they couldn’t figure out the impending route policy rates would be taking in the times to come. Thus, accordingly, the auction participation moved in tandem with the market expectations of no further cuts in the DR in the near term. Thus, 3-year and 5-year maturity bonds remained the favorite picks, pulling over 89 percent of the total participation. Conversely, participation in 10-year bond remained jaded, hauling bids worth Rs.3.38 billion, while unsurprisingly no bids were received for the longest maturity bond of 20-year.
With a cumulative rate cut of 450bps since July FY12, market senses an end to the monetary easing cycle for FY13 for reasons such as extensive government borrowing leading to unabated M2 growth, heightening Rupee/Dollar parity, waning FOREX reserves owing to non-materialisation of foreign flows and increasing NDA/NFA ratio and additional deficit monetisation on the back of election year and populist decision making.
Moreover, the approaching political transition and the ongoing talks of new IMF programme also deterred the participants from investing for longer terms. Besides, confining their investments in relatively shorter tenure bonds to avoid price risk, the vigilant dealers quoted higher bids so as to shield themselves from eminent reversal in monetary easing.
Minimum bids of 11.15 percent, 11.40 percent and 12.0006 percent, respectively, were placed for 3-year, 5-year and 10-year bonds which are 64 bps, 40 bps and 20 bps above the minimum bids quoted for 3-year, 5-year and 10-year bonds in the last auctions, according to the information provided by a MM dealer to BR-Research. This clearly signals the market sentiment that interest rates have bottomed out for FY13 and are set to pick an upward ride.
The bids received, thus turned out to be quite above the government acceptance levels, leading to the refusal of all the bids. This, albeit, is no big an issue for the government as they can grab the desired amount from other avenues such as T-bills and borrowing from the central bank. However, in the midst of investors’ gaze turned towards the shorter tenure papers and interest rate having completed its downward ride, the real ticking time bomb is the rising government rollover cost, leading to further fiscal distortion.
Thus, going forward, the fate of the PIB auctions depends on improvement in the overall economic health and inflation expectations. The post election scenario points towards a new IMF programme which might stabilise the interest rates leading to revival in investors’ interest towards longer term papers.

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