The yields on Treasury bills (T-bill) are likely to rise marginally and remain range bound going forward, as the expected repo rate hike by the Reserve Bank of India (RBI) has already been factored in by traders, money market dealers said. They expect yields to ease in the long run as they have already risen sharply since the central bank started increasing the repo rate.
"In line with changed expectations, the T-bill cut off has eased a bit, but is unlikely to move up. Traders expect a token 25 basis point (bps) hike in the policy rate, and that’s more or less already priced in. No further moves in T-Bill yields are expected in the near future, unless we see a change in the outlook on inflation," said Ajay Manglunia, MD and Head of Investment, JM Financial.
In the previous week's auction, the cut-off yield on T-Bills eased after rising for consecutive weeks. The cut-off yield on the 91-day T-Bill fell by 4 bps, while on the 182-day and 364-day T-bills it fell by 8 and 10 bps, respectively. One basis point is equal to one-hundredth of a percentage point.
Prior to this, cut-off yields had risen by more than 10-12 bps across tenures, since October 19.
"We feel the T-bill rate should remain stable around 6.80-6.90 percent. Short term rates have gone up drastically and will come down slowly. We will see buying in short-term paper going forward," said Umesh Kumar Tulsyan, MD, Sovereign Global Markets, a New Delhi-based fund house.
Expected rate hike by the RBI
Money market dealers feel the RBI is likely to increase the repo rate by 25-35 bps at the upcoming Monetary Policy Committee (MPC) meeting in December.
HDFC Bank’s Treasury Research Desk said in a note that with inflation moving in line with the central bank’s expectations, we might be nearing the end of the rate hike cycle.
CPI-based (Consumer Price Index) retail inflation, dropped to a three-month low of 6.77 percent in October, although it is still above RBI’s comfort zone of 4-6 percent.
"With October number also higher than its comfort zone, the pressure to go for another rate hike in its upcoming December policy meet is plausible. However, with the high base effect kicking in, the inflation numbers are expected to moderate in the coming months. Moderation in global commodity prices and the domestic WPI (Wholesale Price Index) inflation are also comforting factors. Therefore, we can expect RBI to be less hawkish and go for a 35-bps rate hike," CareEdge said in a report.
Nonetheless, there is a need to closely monitor the impact of volatility on food inflation, and the impact of the exchange rate movement on imported inflation, they added.
Further, CareEdge expects inflation to average 6.6 percent in the third quarter and 6.2 percent in the fourth quarter of this fiscal. CPI inflation could fall below 6 percent only by the end of this fiscal.
Market-making in T-bills
RBI Deputy Governor MD Patra, in a speech during the Treasury Heads’ seminar organised by the central bank at Lonavala, said that the situation in the Indian money markets calls for active market-making in 182-day and 364-day T-bills, and perhaps T-bills of other maturities as well, so that a continuous risk-free yield curve emerges.
"In the secondary market, trading is concentrated in the 91-day T-bills, with the 182-day and 364-day T-bills being highly illiquid. This situation calls for active market-making in each of them," he added.
Patra also spoke of the issue of traded deals vs. reported deals in the overnight segment. Cooperative banks lend in the latter half of the day to scheduled commercial banks at rates lower than traded rates and artificially pull down the aggregate rate. This drives a wedge between the policy rate and the weighted average call money rate, which is the operating target.
Thus, even before the monetary policy signal travels through the overnight and term (FD) segments of the money market to the next reference point on the yield curve – the 91-day T-bill rate – there is already some transmission loss.
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