Cash management bills (CMBs) issued by the Reserve Bank of India (RBI) are being favoured by banks to park their surplus liquidity thanks to the ?arbitrage opportunity?.
The cut-off yields on the CMBs, which are fairly liquid, are about 25-30 basis points higher than the call money market rates.
J Moses Harding, head of global markets, IndusInd Bank, said, ?Banks which have surplus cash like to invest in cash management bills as they get 20-30 basis points more than the overnight rates.?
The 49-day cash management bill auctioned by the central bank on Monday had a cut-off yield of 8.285%, which is 15-25 basis points higher than the rates in the overnight segment.
The speedy income tax refunds this time around has prompted more issuances of cash management bills. The government raises money through CMBs to meet its short-term requirements and most auctions have seen large over-subscriptions. The 49-day CMBs worth R6,000 crore, auctioned last Monday, received bids to the tune of R10,380 crore.
?The cash management bill auctions are bound to see oversubscription as as banks are not losing out on yields,? said ADM Chavli, treasury, Bank of Baroda. ?There is a good arbitrage opportunity and the paper can be used to borrow through repo auctions,? he added.
On August 2, the RBI auctioned R8,000 crore worth of CMBs which attracted bids worth R23,520 crore at a cut-off yield of 8.3612%.
Says Mohan Shenoy, group treasurer, Kotak Mahindra Bank, ?CMs are a good short term paper to invest in if you have surplus cash. Even if banks need cash in case of a mismatch, they can refinance themselves through the LAF window at a lower rate at 8%.?