Banks increase investment in 91-day T-Bills over one year on high economic uncertainty

Bonds

Investment by banks in the 91-day Treasury Bills (T-Bill) has increased sharply over the last one year; experts attributed this to volatile and uncertain external economic environment compounded by high inflation and interest rate risk.

According to RBI data, banks investment in 91-day T-Bill rose over 112 percent to Rs 19,820 crore as of September 29, 2023. Last year, investment stood at Rs 9,333 crore as on September 30, 2022.

Vivek Iyer, Partner, Grant Thornton Bharat, said that in a volatile and uncertain external economic environment compounded by high inflation, interest rate risk on the investment portfolio increases. Hence, it is always prudent to increase your exposure in shorter duration bonds and reduce your exposure in longer duration bonds.

“This is exactly the reason why we see the exposure on 91-day T-Bills increase over the past year with an accompanied reduction in the 182-day or 364-day Treasury Bills,” he added.

Since last year, the Reserve Bank of India (RBI) has increased the repo rate by 250 basis points (bps) to tame higher inflation. One basis point is one hundredth of a percentage point.

It has paused the rate since April 2023 after economic conditions improved. Since then, uncertainties at the global level as well as the wait-and-watch phase at the domestic level are prompting banks to invest in the short-term, say analysts. Banks have reduced their ownership in 182-day T-Bills by six percent and 364-day by around 10 percent.

Also read: MC Exclusive I Vietnam-based VinFast to enter Indian e-car market by H2 CY2024 amid govt's duty slash plan

The numbers

As per RBI’s November Bulletin, ownership in 182-day T-Bills stood at Rs 75,415 crore as on September 29, 2023, as compared to Rs 80,243 crore as on September 30, 2023.

Similarly, ownership in 364-day T-Bills of banks stood at Rs 87,844 crore as on September 29, 2023, as compared to Rs 97,268 crore as on September 30, 2023.

The total T-Bills investment by banks, primary dealers, state governments and others stood at Rs 9.26 lakh crore as on September 29, 2023, as against Rs 9.20 lakh crore as on September 30, 2022. This was up just 0.6 percent on-year.

Rise in 91-day cut-off yield

Earlier this month, Moneycontrol reported that the cut-off yield on the 91-day T-Bills 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.

Currently, the cut-off yield on 91-day T-Bills was at 6.9374 percent on November 15.

According to RBI data, the cut-off yield on the 91-day T-Bills 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.

Also read: Corporate bond yields for NBFCs to rise after RBI action on consumer loans, say experts

Way ahead

Money market experts said that the trend is likely to continue in the coming months until there is clarity on the repo rate movement.

“Going forward, the trend is likely to continue till March 2024 for staying invested in short-term T-Bills as against 182-day and 364 days,” said Jyoti Prakash Gadia, Managing Director at Resurgent India.