RBI declines investors' bids for 91-day, 182-day T-bills, a rare step amid tight liquidity

Reserve Bank of India

The Reserve Bank of India (RBI) did not accept bids for the 91-day and 182-day treasury bills (T-Bill) at weekly auction on February 20, turning down offers by investors to purchase the short-term government securities. The move is an unusual step, and experts attribute this to higher rates offered by investors, or seeking greater return than what the central bank may be willing to accept, due to tighter liquidity conditions.

This has happened after nine years for the 182-day T-Bill, and after 23 months for the 91-day T-Bill, as per RBI data. Last time, when the central bank did not accepted bids on 182-day and 91-day T-Bills was on February 24, 2016, and on March 29, 2023, respectively.

“Rates for 91-day and 182-day T-Bill were not comfortable for RBI, and to offer indirect liquidity as amount rejected by default contributes to the overall system liquidity,” Mataprasad Pandey, Vice-President of Arete Capital Service said.

The Government of India issues treasury bills as money market instruments that function as a promissory note, guaranteeing repayment at a later date. Usually, banks, primary dealers, retail investors and institutional investors are investors in T-Bills.

Treasury bills are short-term borrowing tools with a maximum tenure of 364 days, available at a zero-coupon rate of interest. These bills are issued at a discount to the published nominal value of government securities (G-secs).

Treasury heads told Moneycontrol that investors were bidding for these instruments in the range of 6.45-6.47 percent for the 91-day T-bill, and 6.55-6.58 percent for 182-day T-bill, respectively.

“On expectation of higher bids offered by the investors during the auction may have led to not accepting the bids, because it will give clear signal to the market that the RBI is comfortable with the higher rates even after rate cut and during the time when heavy liquidity infusion is happening,” Ritesh Bhusari, Joint GM Treasury at South Indian Bank said.

This was higher compared to the cut-off yield set the previous auctions. The cut-off on the treasury bills have been on the downward trajectory since the rate cut by the RBI in the February monetary policy.

As per RBI data, cut-off yield on the 91-day T-bills have dropped to 6.4445 percent on February 12, from 6.5625 percent on January 29. Similarly, for 182-day T-bills, cut-off yield eased to 6.5700 percent on February 12, from 6.6691 on January 29.

Governor Sanjay Malhotra, after the RBI's Monetary Policy Committee (MPC) meet, announced the repo rate reduction to 6.25 percent, while the rates for the Standing Deposit Facility, Marginal Standing Facility, and bank rates remained at 6.5 percent.

The RBI has increased the repo rate by 250 basis points between May 2022 and February 2023. Since April 2023, the repo rate has been steady at 6.5 percent, in order to keep a check on the inflation to bring it to the medium-term target of 4 percent.

Also, the cash shortfall intensified after December 16, 2024 due to outflow of over Rs 3 lakh crore due to tax payments. This was despite the RBI reducing cash reserve ratio (CRR) from 4.5 percent to 4 percent in December 2024, in anticipation of tighter liquidity. While the reduction in CRR helped the system with Rs 1.16 lakh crore, it wasn't enough to stabilise the Rupee, in light of RBI’s intervention in the forex market to the tune of over $75 billion.

The shortfall put pressure on the overnight money market rates, which traded above the RBI’s repo rate. Weighted average call money rates traded in the 6.6-6.74 percent range since the liquidity turned deficit.

Measures by the RBI have prevented the overnight rate or call money rate from shooting up, but it still remains slightly above the repo rate.