The cut-off yield on the 91-day treasury bill has risen to its highest level in the current financial year in the last two weeks. This is because of tight liquidity conditions in the banking system and movement in yields in government securities, money market experts said.
“At the international level, the stance taken by the US Fed and rising yields in US treasury bonds have impacted the rates in a big way, resulting in a constant pressure on yields. The short-term rates have risen further due to the liquidity overhang,” said Jyoti Prakash Gadia, Managing Director at Resurgent India.
According to RBI data, the cut-off yield on the 91-day treasury bill was 6.9349 percent on October 25, the highest this fiscal year. It dropped to 6.9325 percent on November 1.
Similarly, the 182-day and 364-day cut-off yields also saw an uptick and were close to the highest levels this fiscal in the last two weeks.
According to V. Ramachandra Reddy, deputy general manager (treasury), Karur Vysya Bank, the RBI reiterated in the last monetary policy that rate transmission has not been completed fully either in deposits or lending rates, and signalled that rates would remain high for some time. The RBI has chosen liquidity as a lever to keep rates high.
“The announcement of an OMO sale, an enduring policy tool, is in line with that view. Post policy, there has been a potential shift in Inter Bank rates towards the marginal standing facility (MSF) rate as the operative rate,” Reddy added.
Over the past few days, especially after the monetary policy on October 6, the yield on government securities has risen by 15-17 basis points (bps).
Currently, the yield on the 10-year benchmark government security is at 7.3303 percent.
One basis point is one hundredth of a percentage point.
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What does the data show?
The cut-off yield on the 91-day Treasury bill at the start of this financial year was at 6.9192 percent. Thereafter it remained in the range of 6.72-6.90 percent.
Similarly, the cut-off yield on the 182-day and 364-day bills have remained in the 6.80-7.17 percent and 6.85-7.21 percent range, respectively, so far this financial year.
Gadia added that the 182-day and 364-day bond scenario is also indicative of higher rates persisting due to the sustained inflationary trend, which was aggravated by inadequate kharif sowing leading to higher food price expectations and the likely recurrence of supply chain issues and oil price hikes during this period.
Liquidity conditions
Liquidity in the banking system, which was in a huge surplus last year, started falling due to central bank interventions such as conducting VRRR auctions and using other tools. On top of this, tax and other auction outflows also drained liquidity substantially.
But after the withdrawal of Rs 2,000-denomination banknotes from circulation, liquidity in the system again started rising, and to combat this, the central bank conducted various VRRR auctions in May, June and July.
However, these auctions were just temporary measures and did not help much. Hence, the RBI, in its August monetary policy, introduced the I-CRR to remove excess liquidity from the banking system.
Even after complete withdrawal of the I-CRR, liquidity in the banking system remained in a deficit. The deficit was at around Rs 54,534.23 crore on November 1
Outlook
Money market experts believe that the yield on treasury bills is likely to stay higher in the coming weeks till there is no correction in the yield on government securities.
Adding to this, Karur Vysya Bank’s Reddy noted that currently a no-rate-hike regime is in play, and that the spread of 40 bps over the current operative rate, i.e., the MSF rate, looks attractive for the six-month and 1-year T-bills.
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