Yields on Treasury bills rise as investors turn cautious

October 28, 2021 1:45 AM

Yields on T-bills maturing in 91 days rose by 11 basis points on Wednesday. Those on 182-day and 364-day were up by 13 bps and 9 bps, respectively. The Reserve Bank of India (RBI) accepted the full amount offered for sale in the auction.

The absence of G-SAP operations has put pressure on the longer end of the curve. “We expect liquidity normalisation measures to be the key driver for pushing the shorter end of the curve higher,” a report from Kotak Mahindra Bank said.The absence of G-SAP operations has put pressure on the longer end of the curve. “We expect liquidity normalisation measures to be the key driver for pushing the shorter end of the curve higher,” a report from Kotak Mahindra Bank said.

By Manish M Suvarna

Yields on treasury bills (T-Bill) maturing in 182 days and 364 days rose sharply on Wednesday as investors turned cautious and demanded higher returns owing to uncertainty over tightening of liquidity by the central bank, along with the possibility of a hike in the reverse repo rate in the December policy.

Yields on T-bills maturing in 91 days rose by 11 basis points on Wednesday. Those on 182-day and 364-day were up by 13 bps and 9 bps, respectively. The Reserve Bank of India (RBI) accepted the full amount offered for sale in the auction.

“The increasing amounts under successive VRRRs have pushed the cut-offs towards 3.99%, thereby providing a pricing anchor for short-term money. This has made previous T-bill cut-offs rates an unattractive proposition, so we see the repricing now. Further, the possibility of reverse repo hike in December MPC is also keeping investors cautious,” said Siddharth Chaudhary, senior fund manager – fixed income at Sundaram Mutual Fund.

Market participants said RBI’s aggressive fine-tuning of liquidity through variable-rate reverse repo (VRRR) and the acceptance of higher cut-off at the 7-14 day auctions continue to weigh on the shorter end of the yield curve. The absence of G-SAP operations has put pressure on the longer end of the curve. “We expect liquidity normalisation measures to be the key driver for pushing the shorter end of the curve higher,” a report from Kotak Mahindra Bank said.

The uncertainty among investors emerged after the central bank set the higher cut-off at reverse repo auctions. Since September 28, the central bank is continuously setting a higher cut-off on the reverse repo auctions than the current reverse repo rate of 3.35%. In the previous four auctions, it set a cut-off of 3.99%, much higher than what the market had expected.

“It is a clear indicator that money market rates have gradually started hardening, confirming our hypothesis that slowly we shall have the repo as the operating rate rather than the reverse repo. In near-term policy levels, we may see this corridor narrowing, as before the pandemic, it was a 25-bps corridor,” said Ajay Manglunia, MD and head of institutional fixed income at JM Financial.

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