The yield on the 91-day treasury bill today for the first time breached the repo rate of 5.75 per cent.
At the weekly auction held today, the yield on the 91-day bill was fixed at 5.69 per cent. In effect, this means three-month money is cheaper than one-day money.
The market expects the repo rate cut shortly as overnight money has become dearer than the 91-day bill.
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The repo rate acts as a floor for the overnight call rate which has been hovering around 5.65-75 per cent.
The three-month commercial paper rate which has already breached the bank rate (6.5 per cent) may pierce the 6 per cent level now and inch towards the repo rate, analysts said.
Meanwhile, the Reserve Bank of India (RBI) today raised the cut-off price at its weekly auction of 91-day treasury bills to Rs 98.60 (yield : 5.6951 per cent) from Rs 98.58 (5.7776 per cent) at the previous auction.
At the fortnightly auction of the 364-day bill also the yield came down by about 10 basis points. The RBI raised the cut-off price to Rs 94.46 (yield 5.8810 per cent) from Rs 94.37 (5.9823 per cent).
Reuters adds: Meanwhile, the two-year interest rate swaps indexed to overnight funds dropped on Wednesday as traders bet on a reduction in the key repo rate in the next few days.
One firm struck deals for about one billion rupees with several banks at 5.95-6.0 per cent against Tuesday's close of 6.02/10 per cent, traders said.
"The market is pricing in falls of around five to 10 basis points in anticipation of a repo rate cut soon," said a dealer with a private bank.
A reduction in the repo rate, currently at 5.75 per cent, will have an immediate impact on the market as it is the benchmark for the overnight fund rate.
The market is also expecting a bank rate cut from 6.5 percent, when the central bank reviews the monetary policy in October.
One-year swaps were down at 5.80/85 per cent from 5.84/89 per cent on Tuesday, but no deals were reported.