MC EXCLUSIVE T-Bill cut-off yield at 5.87% across maturities thanks to RBI’s durable liquidity

bonds

With the banking system flushed with additional durable surplus liquidity, Indian treasury bills (a popular money market instrument) witnessed a rare scenario on May 7. The cut-off yield across maturities, 91-day, 182-day and 364-day, were seen at almost the same level of 5.87 percent.

This incident is rare because, all three maturities generally have a gap of cut-off yield of 3-5 basis points.

Money market experts attribute this to Rs 50,000 crore of durable liquidity inflows pumped into the banking system infused on Wednesday through open market operation (OMO) purchases conducted by the Reserve Bank of India (RBI) on May 6. Currently, the liquidity in the banking system is estimated to be in surplus of around Rs 1.37 lakh crore.

The auction was settled today, May 7, with the exchange of bonds for money between the RBI and banks.

The May 6 auction received overwhelming subscription from banks. The RBI received Rs 1.33 lakh crore of bids, more than double the amount it had set aside for the auction. The central bank, however, accepted only Rs 50,000 crore worth of bids.

Consequently, the cut-off yield on treasury bills has fallen by 3-5 basis points (Bps) compared to last week's levels.

According to the RBI data, cut-off yield on the 91-day treasury bill was set at 5.8792 percent, 182-day set at 5.8797 percent, and 364-day at 5.8796 percent for the weekly auction held on May 6.

Experts said that the fall in yield on the treasury bills may help soften the yield on other money market instruments which consequently may lead to lower cost of borrowing for corporates and banks.

Usually, when the call money and treasury bills yields fall, the yield on the other instruments such as commercial papers and certificates follows suit.

In the last few weeks, the yield or rate of money market instruments across categories saw a steady decline due to durable liquidity infusion by the RBI. The daily repo auction has also helped the liquidity to turn surplus.

Rate cuts of 25 bps each by the RBI in the February and April monetary policy respectively have also helped rates or yields ease.