RBI limits treasury bill auction bids as liquidity tightens

The Reserve Bank of India (RBI) today accepted bids of only Rs 697 crore against the notified amount of Rs 2,000 crore in the 91-day treasury bill auction today. In the 364 day T-bill auction, however, the RBI accepted the entire notified amount of Rs 2,000 crore.

According to market participants, the liquidity overhang, which used to be sucked out through the market stabilisation scheme (MSS) earlier, is gradually drying down.

In the 91-day T-bill auction, while Rs 500 crore was mopped up for the government borrowing programme, the balance was part of the MSS. In fact, call rates have consistently remained high at 5.0-5.90 per cent.

Reverse repo bids on Wednesday stood at Rs 9,470 crore. Hence, there was no need for the MSS to suck out the liquidity in the short term. Moreover this week, there are no inflows from government securities maturing or coupon redemptions.

On the other hand, some market players are of the view that the cut-off in the 91-day T-bill has gradually been increasing.

The cut-off in today's auction was 5.39 per cent, which was almost four basis points higher than the yield at last auction. This might be one of the reasons for the RBI to reject the bids for the entire amount.

Dealers said the RBI received bids worth Rs 2,236 crore for the 91-day T-bill auction against the notified amount of Rs 2,000 crore. This signalled a tightness in the short-term in the market.

Today's developments perked up market sentiment, as a result of which government securities prices went up in the long end of the maturity by 30-40 paise. The 10-year 7.38 per cent 2015 gilt closed at 7.08 per cent.