States’ investments in T-bills rise 18% in May in search for higher returns

The 18 percent increase in month-on-month investments by the states in May was lower than the 31 percent on-month rise in April, as per RBI data

State governments increased investments in treasury bills by 18 percent in May from the preceding month as they deployed excess funds to earn high returns and to get positive carry, dealers said.

Treasury bills, or T-Bills, are debt instruments issued by the government, maturing in up to one year, to meet short-term funding needs. Positive carry involves making a profit by investing in an asset using borrowed capital.

According to data from the Reserve Bank of India, state governments invested Rs 91,059 crore in treasury bills in the primary market maturing in 91, 182 and 364 days, as compared to Rs 77,493 crore in April.

“States borrow money during SDL (State Development Loans) auctions but may not immediately deploy those funds and therefore park it temporarily in treasury bills to avoid negative carry,” said Ajay Manglunia, managing director at JM Financial.

Umesh Kumar Tulsyan, managing director of Sovereign Global Markets, a New Delhi-based fund house, said the increase was mainly because of fewer government expenditure avenues at the start of the year and surplus funds coming in from revenue sources.

During the month, the cut-off yield on the T-Bills increased sharply, especially on the 91-day bills, before they moderated, which made these securities attractive for investors. Added to this, money market dealers said states may liquidate these investments at their discretion.

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What does data say?

The 18 percent increase in month-on-month investments by the states in May was lower than the 31 percent on-month rise in April, as per RBI data. However, the investment by states in treasury bills fell 12.1 percent on-year in May.

Arunachal Pradesh increased its investments in T-Bills to Rs 600 crore in May from nil in April, and Gujarat to Rs 17,000 crore in May from Rs 10,000 crore in April.

Karnataka, Odisha, and Tamil Nadu increased their investments in T-Bills, while Maharashtra and Rajasthan cut their investments. Maharashtra reduced to nil in May from Rs 2,000 crore in April, and Rajasthan to Rs 7,300 crore in May from Rs 8,000 crore in April, the data showed.

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T-Bill yields

In May, the cut-off yield on treasury bills in the primary auction rose 2-12 basis points (bps) across tenures due to tight surplus liquidity conditions in the banking system and uneven distribution of liquidity with banks, which led to a rise in call money rates above the repo rate.

One basis point is one-hundredth of a percentage point.

As per RBI data, the cut-off yield on 91-day T-Bills rose over 12 bps, 182-day rose 6 bps, and 364-day rose 2 bps.

The yields rose until May 10, when they started falling due to improved liquidity conditions after the RBI injected funds in the banking system through a repo auction. The central bank conducted a variable rate repo auction on May 19 to address the problems of some banks, RBI Governor Shaktikanta Das said on May 22.

After this, the yields fell by 12-16 bps till the end of May. As of May 31, liquidity in the banking system was at Rs 1.76 lakh crore.