The central government's borrowing cost through Treasury bill (T-bill) issuances has fallen by over 90 basis points across tenures so far this financial year, driven by higher surplus liquidity in the banking system and three rate cuts by the Reserve Bank of India (RBI).
Cost of borrowing through 91-day T-bills fell to 5.3699 percent as on July 2, from 6.2806 percent on April 2, according to the RBI data.
Similarly, borrowing cost of 182-day T-bills fell to 5.5001 percent as on July 2, from 6.2930 percent as on April 2, and 364-day T-bill borrowing cost fell to 5.5494 percent as on July 2, as compared to 6.2958 percent, the data showed.
The decline in borrowing cost coincided with the RBI's 100 bps cumulative repo rate cuts over the last three monetary policies.
The central bank reduced 25 bps each repo rate in February and April, and frontloaded a 50 bps cut in the June monetary policy to aid growth, which has been under pressure due to global uncertainties.
Usually, whenever a rate cut happens, short-term borrowing cost reacts quickly compared to long-term borrowing cost.
Surplus liquidity
Higher surplus liquidity in the banking system also helps ease short-term borrowing cost faster.
Since April, liquidity in the banking system turned surplus due to various measures of the central bank, such as open market operations (OMO) purchases, USD/INR Buy/Sell swap auctions, and daily variable rate repo auctions.
Data from the RBI website shows that the central bank injected Rs 43.61 lakh crore into the system through the daily VRR auctions. These funds got reversed the next day. However, last month, the central bank stopped the daily VRR auctions amid higher surplus liquidity in the banking system.
The central bank also provided Rs 4.84 lakh crore of durable liquidity through 15 OMO purchase auctions and $25.2 billion via USD/INR Buy/Sell swap auctions.
Currently, liquidity in the banking system is in a surplus of around Rs 3.75 lakh crore as on July 2.
Money market experts said that short-term rates may come down further after the phased cash reserve ratio (CRR) cut from September.
The RBI, in its June monetary policy, announced a 100 bps reduction in the CRR to boost liquidity in the banking system — the biggest such cut since 2020.
The CRR cut is scheduled in four tranches of 25 bps each, starting from the fortnight beginning September 6, followed by October 4, November 1 and November 29, 2025.
The timing of the CRR cut is crucial because between September and November, India witnesses a festive season during which currency leakage from the banking system increases, putting pressure on systemic liquidity.
Giving durable liquidity support of Rs 2.5 lakh crore to the banking system during the festive season will ease liquidity pressure at a time when credit growth picks up significantly.
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