The Reserve Bank of India (RBI) on Wednesday rejected all bids at the government’s Treasury bill auction, signalling discomfort with the sharp rise in short-term borrowing costs, dealers said. The last time the central bank rejected bids was in June, when it cancelled the auctions of 182-day and 364-day Treasury bills. At the end of March, it had rejected bids across all three maturities.
The government had planned to raise Rs 23,000 crore through the sale of 91-day, 182-day and 364-day Treasury bills. Traders said the yields demanded by investors may have been higher than the RBI’s expectations.
Government bonds, already under selling pressure due to rising crude oil prices and US Treasury yields, were hit by a further negative trigger after the RBI rejected all bids at the Treasury bill auction.
The yield on the benchmark 10-year government bond settled at 7.44 per cent, the highest since November 4, 2022, against the previous close of 7.39 per cent.
“The yield (on the benchmark 10-year government bond) will now inch up to 7.50 per cent from here. Crude remains the main overhang, with Brent trading around $112 per barrel and US yields have also inched up. That is a worry for the market. The sentiment was again negative after the auction result was announced,” said a dealer at a primary dealership.
The cut-off yields on Treasury bills have risen sharply over the past five weeks. Between September 9 and October 14, yields on 91-day, 182-day and 364-day bills rose by 64 basis points, 83 basis points and 69 basis points, respectively.
At last week’s auction, the government raised funds at yields of 5.73 per cent for 91-day bills, 6.29 per cent for 182-day bills and 6.49 per cent for 364-day bills.
The spread between the yield on 364-day Treasury bills and the RBI’s policy repo rate widened to 99 basis points last week, its highest level in four years, reflecting the rise in short-term borrowing costs.
The central bank has turned decisively hawkish. It raised the repo rate to 5.50 per cent this month and shifted its stance to calibrated tightening, signalling scope for further increases.
Bets on a 50-basis-point increase in December are growing, and the benchmark 10-year yield has risen around 20 basis points since the policy.
Liquidity, which had cushioned the market for much of the year, has dried up. The latest RBI data showed that net liquidity in the banking system stood at a surplus of Rs 48,303 crore on Tuesday.
Consequently, the central bank’s overnight variable rate repo (VRR) auction witnessed strong demand, with bids amounting to Rs 93,241 crore against the notified amount of Rs 50,000 crore.
The weighted average call rate (WACR), which is the operating target of monetary policy, was trading near the marginal standing facility (MSF) rate and settled at 5.64 per cent on Wednesday, against the previous close of 5.66 per cent. The RBI had held a Rs 1 trillion VRR auction on Monday, the first in three months.
“The liquidity has almost dried up which is keeping the overnight rates elevate. We also have tax outflows coming. The RBI would like to keep overnight rates aligned with the repo rate. That’s why they are conducting these temporary liquidity infusion,” said a dealer at a state-owned bank.
The central bank plans to conduct another overnight VRR auction worth Rs. 50,000 crore on Thursday.
