Banks don’t seem too enthused to trade-in short-dated Government Securities (G-Secs/GS) they hold in their investment book for longer-dated G-Secs, going by the results of Monday’s switch/ conversion auction of G-Secs.
The short-dated G-Secs, maturing between 2022 and 2024, carry relatively higher coupon rate vis-a-vis the longer-dated G-Secs, maturing between 2033 and 2061, they were to be converted into.
Of the 10 G-Secs, aggregating ₹20,000 crore, the government wanted to switch into longer-dated G-Secs, only two got favourable response, receiving conversion offers exceeding the notified amount of ₹2,000 crore per G-Sec.
The Reserve Bank of India (RBI), which is the banker and debt manager to the government, accepted offers for conversion of GS 2022 (coupon rate: 5.09 per cent) and GS 2024 (7.32 per cent) for ₹2,000 crore and ₹1,300 crore, respectively, into floating rate bonds (FRBs) maturing in 2033.
Rejects other conversion offers
The Central bank rejected the conversion offers it received for eight other securities. Through the conversion/ switch, the Government postpones redemption of G-Secs to a later date.
Marzban Irani, CIO-Fixed Income, LIC Mutual Fund, said: “In today’s switch, only two G-Secs were converted. FRB doesn’t get traded so often. Going ahead, interest rates are expected to rise. Hence, FRB is a good switch. Response was lacklustre because tendering happens at previous day FIMMDA prices. If prices are lower, market participants would not like to tender securities.”
RBI started conducting the auction for conversion of G-Secs on the third Monday of every month from April 22, 2019.
Bidding in the auction implies that the market participants agree to sell the source security/ies to the government of India (GoI) and simultaneously agree to buy the destination security from GoI at their respective quoted prices.