RBI rejects 91-day treasury bids

A cash-surplus government did not want to offer higher interest rate for short-term money

The Reserve Bank of India (RBI) on Wednesday chose not to buy anything from the Rs 9,000 crore scheduled to be raised through 91-day treasury bills, as a cash surplus government did not want to offer higher interest rate for the short-term money.

The government's cash balance with RBI was at Rs 1.42 lakh crore as on January 25, much higher than what the government maintains on a regular basis. However, the higher cash balance has also ensured that banking liquidity has dried up and short-term rates have spiked.

Besides, continued supply from state governments have also put pressure on bond yields and the market now wants higher rates for their money. Not that the government is in need of cash.

“Government doesn't need short-term cash anyway. Mutual funds did not bid for the bills as the maturity will be after the financial year. Banks alone do not have appetite for such huge amount,” said Devendra Dash, senior bond trader at DCB Bank Ltd. The yields are also on the rise due to continued pressure from state development loans. On Monday, the cut-off of the state development loans were 8.38-8.42 per cent, about 70 basis points higher than the equal maturity sovereign bonds. Normally, the spread is contained within 30-40 basis points.