Treasury Bill cut-off yield rises on expectation of reverse repo hike

Market participants said the liquidity in the system is in huge surplus and the cut-off set by the RBI at both the 7-day VRRRs was higher, leading to speculation that it is likely to hike the reverse repo rate.

Written by Guest

October 7, 2021 01:30 IST

“I don't think a rate hike is on the table, but narrowing the corridor by taking reverse repo a bit higher is a possibility and can't be ruled out,” Manglunia said.

By Manish M Suvarna

The cut-off yield on treasury bills (T-bill) across tenures rose for the second time in a row on Wednesday as investors demanded higher returns on hopes that the central bank will drain liquidity from the system and increase the reverse repo rate in the monetary policy.

The yield was higher despite the Reserve Bank of India (RBI) setting a lower cut-off of 3.61% at variable rate reverse repo (VRRR) auction on Tuesday. On October 6, the RBI set the cut-off yield at 3.4777% on 91-day, 3.6033% on 182-day and 3.8872% on 364-day T-Bills, which was 3-8 basis points higher than the previous cut-off.

“T-Bill cut-off is higher, it being closer to the policy, people are cautious in bidding and want to participate assuming that there could be any step by RBI to drain liquidity or reverse repo hike and that may impact rates,” said Ajay Manglunia, MD and head of institutional fixed income at JM Financial.

“I don’t think a rate hike is on the table, but narrowing the corridor by taking reverse repo a bit higher is a possibility and can’t be ruled out,” Manglunia said.

Currently, surplus liquidity in the banking system is estimated at around Rs 8.65 lakh crore. To manage the huge surplus liquidity, the RBI conducted various reverse repo auctions, but it did not help.

Some dealers are expecting the duration of VRRR auction to be increased by the RBI. This was because the central bank was till now conducting VRRR of 3-day, 4-day, 7-day, 14-day since the last monetary policy. This led to predict the market that the central bank is hinting at keeping short-term rates higher.

A CARE Ratings report said the RBI would not tighten liquidity as the domestic economic recovery is expected to gather momentum in Q3 and Q4 of FY22. While the RBI would continue to maintain adequate liquidity in the system, it would try to manage it in a calibrated manner by conducting VRRR auctions for longer tenurer and higher quantum.

This article was first uploaded on October seven, twenty twenty-one, at thirty minutes past one in the night.