Treasury Bill yields at multi-year high on near-term liquidity fears

India's 91-day and 182-day treasury bill yields remain at near multi-year highs on concerns over tight liquidity in the medium term, analysts said.

The Reserve Bank of India today sold 91-day notes at 6.47% cutoff yield, highest since May 2019, while the 182-day bills were sold at 6.80% yield, highest since January 2019.

Yields across both securities rose 7-8 basis points over the previous week's auction.

"The view that banking system liquidity is expected to remain tight is firming up," said Rajeev Pawar, head of treasury at Ujjivan Small Finance Bank. "Even if the central bank pauses on rate action soon, it will continue to maintain tight liquidity conditions."

India's banking system liquidity turned to surplus after staying in deficit for two weeks, but most market participants see the deficit widening further in coming weeks.

With an increasing supply of short-term debt, mutual funds are seeking higher returns, traders added.

The yield on the 91-day papers has jumped 84 basis points since the start of September, while that on the 182-day bills has risen 70 basis points, when banking system liquidity slipped into deficit multiple times.

"With pressure on the currency, there is very little possibility that the central bank will come in with any measure to support liquidity, and it will be dependent only on government spending," said Abhishek Upadhyay, senior economist at ICICI Securities Primary Dealership.

Earlier in the day, Reserve Bank of India governor Shaktikanta Das had said, the current episode of liquidity strain is likely to be transitory on account of several factors.

The currency leakage may slow, and government expenditure will pick up, while the pace of forex outflows moderated, which augurs well for liquidity in the system, the governor said. He also said that banks are parking a higher quantum under the Standing Deposit Facility (SDF) meant for excess liquidity.

"Though the SDF window saw higher inflow, this is all temporary and should come down within a matter of days, and uncertainties regarding Fed policy outcome as well as RBI's moves also warrants some caution for the ultra-short end," a trader with a private bank said.

 

(Reporting by Dharamraj Lalit Dhutia; Editing by Dhanya Ann Thoppil)