Reserve Bank Move Stifles T-Bills Market

The decision by Reserve Bank of India (RBI) to accept surplus funds of the banking system at 9 per cent through repos and not hike the cut off yield at the auction of 14-day and 91-day treasury bills from the present level of 7.23 per cent and 7.35 per cent respectively has virtually killed the treasury bills market.

Competitive bidders have preferred to park money with RBI through repos rather than invest in treasury bills. At the same time, they have not reinvested the proceeds from the maturing of existing stock of treasury bills. The RBI has not raised any resources at the last three auctions of 364-day treasury bills. Consequently, the outstanding stock of 364-day T-bills has declined from Rs 17,517 crore on January 14 to Rs 16,771 crore by February 13.

 

At the auction of 91-day treasury bills, since primary dealers have shied away from underwriting, the devolvement has been on the central bank. The stock of 91-day treasury bills with RBI has gone up from Rs 244 crore to Rs 466 crore.

The outstanding stock of 91-day treasury bills has declined by Rs 600 crore to Rs 2850 crore. The measures which the central bank announced on January 16 were undoubtedly justified. "However, the decision not to offer higher yields on 14-day, 91-day and 364-day T bills is baffling," says S R Kamath, deputy general manager, STCI.

Since the Bank Rate was hiked by 2 per cent and cash reserve ratio by 50 basis points, Kamath's logic is that RBI should be offering at least 9.25 per cent on 14-day, between 9.50 - 9.75 per cent on 91-day and at least 10 per cent on 364-day T-bills. This would ensure that competitive bidders do not go for the soft option of parking funds in repos. "This time around, the money and securities market has paid a heavy price in order to rein in volatility in the forex market. It remains to be seen when the market would recover," says a primary dealer.

Strange are the ways of RBI for it offers a commission of 12 paise to the primary dealers. While the successful competitive bidders get a yield of 7.32 per cent, the primary dealers get a yield of 10.47 per cent. However, primary dealers in general have stayed clear of underwriting the issues.

It is in the interest of RBI to ensure that a conducive interest rate regime is created ahead of the next year's borrowing programme of the government. At the same time, the interest of banks in T-bills has to be regenerated. For, in April, over Rs 4,800 crore worth 364-day T bills are maturing, and the government would rather have them reinvest it.