At the sixth auction of the series on Tuesday, where R1,000 crore worth of IIBs were offered, no bids were received from retail investors in the non-competitive segment of the auction, even though the auction was fully subscribed by institutional investors.
This is the fourth successive auction which has seen no bids from retail investors. As per auction rules, 20% of the auction size is reserved for retail investors. However, if the portion is not subscribed, institutional investors can bid for the same.
At Tuesday's auction, the RBI set a cutoff yield of 3.63% compared to 3.33% at the previous auction in October.
Market participants said as the RBI intends to introduce instruments linked to retail inflation, investors are staying away from the current series of IIBs. Since the RBI mentioned that there would be a CPI-linked instrument, most people are waiting for that. From just an optical basis, the 3% differential between the CPI and WPI is making people wait for the CPI-linked instruments, said Ananth Narayan G, co-head, wholesale banking, and head of global markets at Standard Chartered Bank.
RBI governor Raghuram Rajan, after taking over in September, had announced that retail inflation-linked savings certificates would be issued soon. Separately, deputy governor HR Khan indicated on Monday that IIBs for retail investors would be issued in December.
Meanwhile, interest in IIBs from institutional investors has also been dwindling as is evident from the rise in the cutoff yield at every successive auction. In fact, investors who bought these bonds in the first two auctions are now sitting on significant losses as yields have surged by 200 bps since June when the bonds were first introduced.
Between June and now, the yield on the IIBs has surged by 219 bps while that of the 10-year benchmark bond has risen by 188 bps. This implies that investors in IIBs have racked up more losses than in other categories of bonds. For instance, an investor who has bought the bonds in the second auction at 1.98% yield would have made a loss of R10 crore on an investment of R100 crore.
Traders said IIBs are not meant for institutional investors such as banks and primary dealers who are big players in the bond market.
These are suitable for retail investors. In the institutional market, they have little value, said Ashish Parthasarthy, head of treasury at HDFC Bank. Limited institutional interest has meant that trading volumes on IIBs in the secondary market have also dropped. The low coupon of 1.44% is also seen as a deterrent, with investors such as mutual funds preferring to invest in higher-yielding nominal government bonds over IIBs.