Mkts see pause in interest rate rise after September

Market participants feel the Reserve Bank of India (RBI) may raise rates till September. This sentiment was strongly reflected in the auction of treasury bills held on Wednesday.

The government on Wednesday raised Rs 8,000 crore through the auction of 91-day treasury bills, while the sale of 182-day treasury bills fetched Rs 3,000 crore. The cut-offs on both the papers stood at 8.23 per cent. “Players placed aggressive bids on the 91-day paper, expecting one or two rate increases in the next three months, after which, there could be a pause on rate increases,” said a treasury official with IDBI Bank.

RBI received 66 bids worth Rs 11,355 crore on the 182-day treasury bill, while 81 bids worth Rs 16,568.60 crore were received for the 91-day paper. Non-competitive bids, which represent state governments or co-operative banks, for the 91-day treasury bill, worth Rs 2,000 crore, were also accepted.
 

NO RESPITE
Auction Date	91-day T-bills Cut off yield in %	182-day T-bills  Cut off yield in %
4-May-11	7.8936
11-May-11	8.0604	8.2040
18-May-11	8.1022
25-May-11	8.1439	8.2692
1-Jun-11	8.1857
8-Jun-11	8.2275	8.2257
Source: RBI

The yields on treasury bills have been rising since the government announced a higher requirement than what was planned earlier. According to the revised calendar, the government is now borrowing Rs 11,000 crore every week, compared with the Rs 7,000 crore planned earlier. The increased borrowings have resulted in the cut-off yields on the 91-day treasury bills hardening by over 35 basis points in a month.

Reflecting market sentiments, last week, the interest swaps were inverted with the one-year overnight indexed swaps, trading at levels higher than five-year swaps.

RBI has already raised the policy rate by 250 basis points since March 2010, citing inflationary pressures. It would review the monetary and credit policy for 2011-12 on June 16, while the first quarter review would be held on July 26.

According to a Deutsche bank official, RBI may raise rates by 75 basis points in the current financial year, with a rise of 25 basis points expected in the mid-quarterly review next week.