Yields on treasury bills (T-bills) have stayed under check despite concerns such as tight liquidity and heavy weekly supply. Market participants said there was appetite for short-term government securities, amid uncertainty on interest rates over the longer end of the curve.
Since the start of the current financial year (2012-13), yields on the 91-day bills have moved in the range of 8.3-8.4 per cent, while those on the 10-year benchmark government bond have fluctuated at 8.3-8.7 per cent. Yields on the T-bills have fallen from the nine per cent levels seen towards the end of 2011-12.
T-bills are eligible to be held under the Statutory Liquidity Ratio requirement for banks. These securities can be used to borrow funds from the Reserve Bank of India (RBI) at a repo rate of eight per cent. “The advantage of differential between yields on T-bills and the repo rate would stay till the liquidity deficit is above RBI's comfort level,” said a senior treasury official from a public sector bank.
The liquidity deficit has stayed well above the central bank’s comfort level of Rs 60,000 crore (one per cent of net demand and time liabilities) since FY13 began. Banks have also been tapping the Marginal Standing Facility frequently. RBI also bought Rs 9,800 crore of government bonds through Open Market Operations last week, which helped cool yields on the 10-year benchmark government bond.
“The front end of the yield curve always reacts to policy rate expectations. If markets are expecting rate cuts instead of increases, there would be good demand for short-term papers,” said Vivek Rajpal, India Rates Strategist at Nomura.
Growth in industrial production turning negative in March had raised hopes of a rate cut in RBI’s mid-quarter policy review, scheduled on June 18. However, with inflation rising to above seven per cent in April, it is expected the central bank would hold policy rates. “RBI's room for flexibility has been exhausted. The best the central bank can do now is to remain on the sidelines, with rates unchanged, and focus on ensuring orderly supply of liquidity as well as overseeing the stability of the financial sector,” said economists at Deutsche Bank in a report.
RBI had announced a reduction of 50 basis points in the policy rate at the annual monetary and credit policy review on April 17.
So far, in FY13, the government has raised Rs 85,000 crore via sale of T-bills, taking the total amount of dues on this to Rs 3.8 lakh crore, according to RBI data. Tomorrow, RBI will auction Rs 10,000 crore of 91-Day T-bills and Rs 5,000 crore of 364-Day T-bills. Similarly, Rs 14,000-15,000 crore of weekly issuances are lined up till the end of this financial year’s first quarter.
