T-bill yields fall below overnight rate amid RBI rate cut expectation

"This is because the system liquidity surplus is almost Rs 3 trillion and there are expectations of a deeper rate cut," said Anshul Chandak, Head of Treasury at RBL Bank

Short-term yields on treasury bills have dipped below overnight borrowing rates for banks, an inversion driven amid surplus liquidity in the banking system.

 

Cut-off yields on 91-day, 184-day, and 364-day treasury bills were set at 5.58 per cent, 5.60 per cent, and 5.60 per cent, respectively, at the weekly auction on Wednesday. Weighted average call rate was trading at 5.75 per cent.

 

“This is because the system liquidity surplus is almost at Rs. 3 trillion and there are expectations of deeper rate cut,” said Anshul Chandak, head of treasury at RBL Bank.

 

Net liquidity in the banking system was more than Rs. 2.86 trillion on Wednesday, according to data from the Reserve Bank of India (RBI). As of May 2025, system liquidity averaged around Rs.1.6 trillion, or 0.7 per cent of Net Demand and Time Liabilities (NDTL). It is projected to rise to around Rs 5 trillion, or 2 per cent of NDTL, by the end of August.

 

Market participants said there is expectation that the RBI’s Monetary Policy Committee will on Friday cut the repo rate by 50 basis points as headline inflation numbers have moderated — a sentiment that weighed on treasury bill yields. 

 

India’s retail inflation eased to 3.16 per cent in April from 3.34 per cent in March, driven by a sharp decline in vegetable and pulse prices. It was the lowest Consumer Price Index inflation since July 2019, when it was 3.15 per cent. Food inflation has also dropped, hitting a 42-month low of 1.78 per cent in April, compared to 2.69 per cent in March. The decline was led by an 11 per cent year-on-year fall in vegetable prices and a 5.23 per cent drop in pulses — the steepest decline in over six years.

 

"Some participants are expecting a 50 basis point cut tomorrow and system liquidity is in surplus so the expectations are that RBI may cut down short-term rates for quicker transmission," said a dealer with a primary dealership.

 

Despite a 25 basis point rate cut in February 2025, transmission in the banking system is uneven, largely due to tight liquidity conditions. However, after another 25 basis points rate cut, the banking system returned to surplus liquidity in April after more than four months. System liquidity was supported by increased government expenditure and the RBI’s liquidity infusion measures, such as dollar-rupee buy/sell swap auctions, open market operations, and variable rate repo auctions.