Yield on short-term debt instruments falls up to 20 bps on easing liquidity conditions

Interest Rate

The yield on short-term debt instruments such as commercial paper, certificates of deposit and treasury bills fell about 20 basis points (bps) over the past two weeks as liquidity conditions eased, money market experts said.

“Liquidity in the banking system has improved significantly during the last few weeks (from deficit to surplus), resulting in easing of overnight operative rates and short-term money market rates since the beginning of April,” said Anshul Chandak, head of treasury at RBL Bank.

Liquidity with banks, which remained in deficit mode in most months of the previous financial year, improved after mid-March due to government spending and some intervention by the central bank in forex market, the experts said.

As per the Reserve Bank of India’s data, systemic liquidity, which was in a deficit of about Rs 1.90 lakh crore on February 28, improved to a surplus of Rs 98,920.67 crore on April 15. This also resulted in overnight rates trading below the repo rate on most days in April.

"Short Term debt yields will continue to trade at current levels, as most of the demand supply led pressures have evened out now. Any significant move will happen with policy rate changes and easing inflation," said Ajay Manglunia, managing director and head of investment group at JM Financial.

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Numbers

The cut-off yield in the primary auction fell about 6 bps for 91-day Treasury Bills, and by 11 bps each for 182 days, and 364 days since start of this financial year.

Prior to this, the cut-off yield on all three bills between November and March rose by 7-8 bps. This was due to tight liquidity conditions in the banking system. However, the cut-off yield on 364-day T-bills fell 7 bps during this period.

"We have seen an elevated money market rates during February and March months due to Financial year end as the Banks were clamour for resource mobilisation to boost their liability book to meet the burgeoning credit demand and to keep the Loan to Deposit ratio at reasonable levels," said V. Ramachandra Reddy, Head Treasury of The Karur Vysya Bank.

Similarly, the yield on commercial paper (CP) and certificates of deposit (CD) also fell sharply.

The yield on CPs issued by non-banking finance companies traded at 7.90-8.10 percent at the end of March and fell to 7.50-7.90 percent on April 15. The yield on manufacturing company CPs fell to 7.45-7.65 percent in April, from 7.50-7.70 percent in March.

CDs issued by banks have also seen a fall in yield to 7.10-7.20 percent in April from 7.40-7.60 percent in March.

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RBI intervention

Money market experts said that with surplus liquidity and overnight rates hovering below the repo rate, the RBI may be prompted to conduct more variable rate reverse repo (VRRR) auctions in the days ahead. This is to align overnight rates with the repo rate, a dealer with a state-owned bank said.

“We expect the RBI to continue to conduct VRRR auctions on an ongoing basis till systemic liquidity is in surplus to minimise volatility in overnight rates,” Chandak added.

So far this month, the central bank has conducted seven VRRR auctions to remove excess liquidity from the banking system. The total notified amount of all these auctions was Rs 6.75 lakh crore, in which banks parked over Rs 1.54 lakh crore, as per RBI data.

The central bank conducted two 3-day VRRR auctions on April 2, two 2-day VRRR auctions on April 3, one overnight VRRR auction on April 4, a 14-day VRRR auction on April 15, and a 2-day VRRR auction on April 16.

"I believe RBI will continue to do fine tuning operations I.e VRRR auctions, to suck out the liquidity whenever the interbank rates fell below the Repo rate," Reddy added.