Weekly Treasury bills' yield rise as bank liquidity deficit nears Rs 1 trn

The cut-off yield at the weekly Treasury bills auction was set higher than the previous week as the banking system liquidity neared Rs 1 trillion, market participants said.

The Reserve Bank of India set the cut-off yield on 91-day, 182-day and 364-day T-bill at 6.93 per cent, 7.14 per cent and 7.16 per cent respectively.

The yield on 91-day T-bills was set 4 basis points higher, whereas that on 364-day T-bills was set 2 bps higher. The cut-off on the 182-day T-bill remained the same as the previous week. Over the last two months, yields on T-bills have gone up by 7-11 bps across tenures.

"The 3-month T-bill yield was most affected because the market believes that liquidity condition is going to remain the same for the next six months before easing out," a dealer at a state-owned bank said. "It will not remain at a similar level, but the market is now used to a Rs 10,000 crore to Rs 12,000 crore deficit," he added.

The RBI infused Rs 98,754 crore in the banking system on Tuesday, followed by Rs 98,476 crore on Monday, central bank data showed.

The liquidity has largely remained in deficit since September 15. The deficit liquidity neared Rs 1.47 trillion on September 19, the highest since January 29, 2020, when the banking system liquidity deficit went up to Rs 3 trillion.

Market participants expect the liquidity to improve by the first week of November on the back of government spending and maturity of government bonds.

"Around Rs 1 trillion worth of liquidity is expected to come into the system by the first week of November through government spending and redemptions," a dealer at a primary dealership said. "However, the RBI's open market operation (OMO) auction is also expected around that time," he added.

Market participants expect the RBI to issue a notification on open market operation sales by the end of October. They speculate that the central bank might conduct an OMO auction in the first week of November in multiple tranches of Rs 10,000 crore. The amount is expected to be between Rs 50,000 crore and Rs 70,000 crore. The tenure of the bonds in the auction is expected to be 5-7 years.

RBI Governor Shaktikanta Das had said in the monetary policy statement that the central bank might conduct open market operations to mop up excess liquidity.