T-bill auction cut-off yield surges 49 bps

But RBI rejects 182-day t-bill bids.

The cut-off yield on 91-day treasury bills (t-bill) shot up by 49 basis points at today's auction, in the aftermath of the Reserve Bank of India's (RBI) decision yesterday to hike the reverse repo rate by 25 basis points to 5.50 per cent. One basis point is one hundredth of one per cent.

The RBI, however, rejected all the bids received for 182-day t-bills as it was not comfortable with the market-related yields expected by the bidders, dealers said.

RBI accepted bids for 91-day t-bills at a cut-off yield of 6.68 per cent, sharply up from 6.19 per cent at the last week's auction. The bids received for the 182-day t-bills were at yields of around 6.80 per cent. Both the auctions were for Rs 500 crore each.

The yields on gilts rose for the second straight day today. The yield on the 8.07 per cent 2017 government bond, one of the most liquid papers, has risen by 24 basis points to 7.44 per cent since the announcement of rate hike yesterday. The price of the 11-year gilt has fallen by 3.33 per cent in two days.

The yield on the 7.37 per cent 2014 government bond increased by 18 basis points to 7.26 per cent today. The yields on government bonds are increasing as the RBI's move to raise the reverse repo rate was entirely unexpected by the market.

"The gilt market should find some support at these levels," said a chief dealer. He said by tinkering only with the reverse repo and repo rate, RBI has signalled that only short-term rates are set to harden. Hence the yields on medium to long-tenure government stocks look stable.

The 25 basis points hike in reverse repo rate is the fourth in the past 18 months. The market was lacklustre before the announcement of the quarterly review with the trade volumes shrinking. In fact, during last week, most banks were sellers.