The Reserve Bank of India (RBI) on Monday auctioned 40-year government securities for the first time, raising Rs 1,000 crore for the Centre. The securities maturing on October 26, 2055, were offered at a yield of 7.72 per cent and got fully subscribed.
The bonds of long tenure of 40 years are launched in view of the elongation of maturity of the portfolio which is preferred to limit rollover risk and is internationally followed in the advanced economies. Currently, the Indian government securities yield curve spans 30 years and there is reasonable demand for bonds having maturities above 20 years from insurance firms and provident funds seeking to hedge long-term liabilities.
The initial size of Rs 1,000 crore would also help to gauge the quantum of demand for these bonds and whether the size can be increased or decreased based on the experience. The RBI also auctioned Rs 2,000 crore worth of 29-year bonds at an yield to maturity of 7.8152 per cent and a cut off price of Rs 104.04 on Friday.
Many countries, including the UK, have bonds with 60-year maturity as there was enough appetite for the product among pension and insurance funds. A long-tenor bond will help in easing redemption pressure as also discovery of a benchmark yield needed for infrastructure financing, but the government needs to ensure liquidity.
In developed markets like the US, big corporations go for long-term bonds. Microsoft, earlier this year, sold $ 2.25 bn 40-year bonds for the first time in its history, joining the ranks of multinationals that have offered long-term corporate debt in the US this year. Walt Disney Company and Coca-Cola have issued 100-year bonds in the past. Many of these bonds and debentures contain an option that lets the debt issuer partially or fully repay the debt long before the scheduled maturity.
The RBI auction of 40-year bonds has come after the RBI announced the guidelines on foreign portfolio investment (FPI) limits in government securities which will broaden participation across the yield curve, help investors plan allocations systematically and alleviate concerns over ‘hot money’ outflows in the event of global volatility resurgence. The additional limit of Rs 13,000 crore in G-secs has to be allocated across the yield curve with an overall cap rate of 20 per cent. Also, Rs 7,500 crore has been earmarked for long-term FPIs which will provide a stable source of funding. This clearly articulated borrowing plan will help the government to fund a part of its requirements in a more predictable manner.