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Yield and Price Based Auction for G-Sec

Government securities can be auctioned either through yield based auction or price based auction.

What is Government Security (G-Sec)?

Government Security (G-Sec) is a tradeable instrument issued by the Central Government or the State Governments. 

G-Secs carry practically no risk of default and, hence, are called risk-free gilt-edged instruments.

What are the types of auctions for issue of G-Sec? 

Following are the types of auctions for issue of G-Sec –

  • Yield Based Auction
  • Price Based Auction 

Yield Based Auction Price Based Auction
A yield-based auction is generally conducted when a new G-Sec is issued. A price based auction is conducted when Government of India re-issues securities which have already been issued earlier.
Investors bid in yield terms up to 2 decimal places (e.g., 8.19%, 8.20%, etc.). Bidders quote in terms of price per ₹100 of face value of the security (e.g., ₹102.00, ₹99.00, etc., per ₹100/-).
Bids are arranged in ascending order of yield quoted and the cut-off yield is arrived at the yield corresponding to the notified amount of the auction. Bids are arranged in descending order of price offered and the cut-off price is arrived at the price corresponding to the notified amount of the auction.
Successful bidders are those who have bid at or below the cut-off yield. Successful bidders are those who have bid at or above the cut-off price.
Bids which are above the cut-off yield are rejected. Bids which are below the cut-off price are rejected.
The cut-off yield is fixed as the coupon rate for the security. Depending upon the method of allocation to successful bidders, auction may be conducted on Uniform Price basis or Multiple Price basis.
  • Uniform Price auction – All the successful bidders are required to pay for the allotted quantity of securities at the same rate, i.e., at the auction cut-off rate, irrespective of the rate quoted by them.
  • Multiple Price auction – The successful bidders are required to pay for the allotted quantity of securities at the respective price / yield at which they have bid.


References

Reserve Bank of India. (2020, April 01). 'Government Securities Market in India – A Primer'. Retrieved from https://www.rbi.org.in/Scripts/FAQView.aspx?Id=79


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