The auction, to be conducted in Mumbai, is for an aggregate amount of Rs 5,000 crore and the securities which will be re-issued are the 11.19 per cent government stock 2005 and the 12.32 per cent government stock 2011 for a notified amount of Rs 3,000 crore and Rs 2,000 crore respectively. Both the stocks will qualify for the ready-forward facility.

Listing the rationale behind the re-issue of old stock, a research report by ICICI Securities and Finance Corporation (I-Sec), released in Mumbai on Friday, said, "RBI intends to introduce STRIPS (separate trading of registered interest and principal securities) in the Indian markets. To enable a liquid STRIPS market, a necessary condition is that each coupon payment should be large. Re-issuing oldstock reduces the total number of securities and increases the outstanding amount of existing securities, leading to larger coupon payments on those dates. The price-base option is therefore to ensure that the same coupon rate is maintained and yet the securities are issued at market related yields."

"The auction is on price-basis, which means that the bidders have to mention the clean price which they will be willing to pay. However, the auction being on variable price basis (French auction) implies that the successful bidders will pay the price at which they bid (inclusive of accrued interest), not the cut-off price," the I-Sec report said and added that the RBI is not signalling a yield by announcing the coupon.

The I-Sec report said that the price auction will result in finer bidding. "The earlier system of bidding for yields resulted in the maximum difference between bids at 1 basis points. In a price-based auction system, the bids are in steps of 1 paisa. For a six year security, this translates toabout 0.23 basis points, while for a twelve year security this is just 0.16 basis points," the report said.

The report adds that currently, six-year securities are trading at 11.39 per cent yield, while there is no trading in the twelve year segment. "With ten year securities trading around 11.86 per cent and fourteen year securities trading around 12.21 per cent, the yield for twelve year security works out to be around 12 per cennt," I-Sec report said.