How Effective Is The Move To Hike The Treasury Bill Notified Amount In Managing Liquidity?

A very mature decision

K Harihar

Head-Treasury,

Development Credit Bank

An interesting move last week was the hiking of the notified amount for 91-day treasury bills from Rs 500 crore to Rs 1500 crore per week for the next eight weeks.

This move was obviously done with the objective of applying the brakes on the rally (yields on 10-year papers crashing to historic lows of 5.52 per cent) in government securities.

While security prices did come off in a knee-jerk reaction, on a closer analysis it can be seen that this move has many factors in its favour.

The most important point was that it was a gradualised pull out of liquidity. While the total hike in the treasury bills to be auctioned aggregates to Rs 8000 crore, this amount is going to be pulled out over eight weeks allowing market participants time to adjust their positions and cash flows.

The markets would certainly have been jolted had there been a one-time open market operation (OMO). Also, the current liquidity pull out is through a 91-day paper which means the drawn out monies will return to the system soon.

Interestingly, the drawn monies would flow back in by November which is reassuring for the market that is bracing for a Rs 25,000 crore outflow in the first week of October on account of the maturing of the Resurgent India Bonds.

Most importantly, this move manages to stop the runaway rally in gilts without creating a fierce reversal of prices and a rise in yields.

The latter case would have been catastrophic since the government borrowing program has a good distance to cover and a yield pick up could affect the success of the programme.

Also, there is a lot of retail and wholesale money locked in fixed income mutual funds and a sharp fall in prices could have had disastrous effects on the NAVs and would also have had the potential to trigger stop loss chains.

Thus, on balance, the announcement is clearly a mature way of sending a message to the markets.

The immediate impact of the move will be a rise in yields in the short term and an increase in 91-day and 364-day T-bill rates to around 4.90-4.95 levels, which is only right considering that call rates are currently around that level.

The two main factors that are driving the bond market are liquidity levels and the inflation outlook. The liquidity situation continues to be comfortable with over Rs 30,000 crore subscriptions in the one-day repo and another Rs 20,000 crore in 14-day repo.

Also, despite the cap on the deposit rates payable on NRIs bringing down the arbitrage possibilities, we continue to see good inflows