India’s short-term borrowing costs dip to lowest since 2022

The RBI began a series of aggressive interest rate increases in 2022. But slowing consumer demand and concerns about the health of the global economy are now fueling calls for cuts.

Short-term borrowing costs in India declined to the lowest in nearly two years, reflecting a buildup of liquidity in the banking system just as calls for central bank policy pivot mount.

The yield on the 364-day treasury bill dipped to 6.7240% in an auction on Wednesday, the least since September 2022. The yield on other very short-dated papers also dipped.

Lower government borrowing via treasury bills has helped push borrowing costs lower, with government spending after elections fueling a liquidity surplus. An additional driver are the RBI’s currency interventions in the face of overseas capital inflows liked to India’s inclusion in JPMorgan Chase & Co.’s emerging market bond index.

“Cyclically during this time we don’t see much of a cash withdrawal,” which would be a big drain on liquidity, said Pankaj Pathak, a senior fixed income fund manager at Quantum Asset Management Co. Short-term rates are likely to stay low for a few more months as the system remains in excess ahead of the festive season, he added.

The RBI began a series of aggressive interest rate increases in 2022. But slowing consumer demand and concerns about the health of the global economy are now fueling calls for cuts.

Inter-system liquidity stood at 1.5 trillion rupees ($17.9 billion) on Aug. 13, according to a Bloomberg Economics gauge. Nomura Holdings, Inc. strategist Nathan Sribalasundaram expects it to stay in surplus until late September.