RBI likely to cancel next week's T-bill auction given large cash balance

Net liquidity in the banking system was in a deficit of ₹2.32 trillion as of Thursday, and has been in deficit mode for the past fourteen consecutive weeks

The Reserve Bank of India (RBI) is likely to cancel next week’s weekly treasury bill auction, sources said. With the government likely to have a comfortable cash balance, the RBI is looking to support liquidity in the banking system by taking this step, they added. 

“The government is likely to be sitting on a relatively comfortable cash balance now, so the RBI might decide to take the step to support banking system liquidity,” said the treasury head at a private bank. 

Net liquidity in the banking system was in a deficit of ₹2.32 trillion as of Thursday, according to the latest RBI data, and has been in deficit mode for the past fourteen consecutive weeks. 

Previously, on February 20, RBI had not accepted any bids on 91-day and 182-day treasury bills at the weekly auction due to tight liquidity conditions. This was a first in nine years for the 182-day treasury bill and the first time in 23 months for the 91-day treasury bills, according to RBI data. 

The last time the central bank did not accept bids for the t182-day and 91-day treasury bills was on February 24, 2016, and March 29, 2023, respectively. 

“The market is expecting that there will be no treasury bill auction next week, because it's possible that the government would want to utilise the cash balance before March 31, so it’s no use to borrow at this moment,” said the treasury head at another private bank. 

The Government of India issues treasury bills as money market instruments, essentially functioning as promissory notes with a commitment to repay at a later date. Typically, treasury bills attract investment from banks, primary dealers, retail investors, and institutional investors. 

Treasury bills are short-term borrowing instruments with a maximum maturity of 364 days, offered at a zero-coupon rate. They are issued at a discount to the nominal value of government securities (G-secs). 

Additionally, the bond supply from states is expected to be lower at the last weekly auction of the current financial year. The heavy supply and a lack of demand from long term investors and banks not buying aggressively due to liquidity issues have pushed yields on states' bonds higher. 

The yield spread on state government securities over government securities have widened from 30-35 basis points (bps) to 45-50 bps.