The Missing Link

The 14 day T Bill could be a popular short-term instrument, if some teething troubles are taken care of.

With the introduction of the 14 day treasury bill last week, the Reserve Bank of India (RBI) has added one more instrument to the range of short term investment options available to banks. Money market players have welcomed the RBI move for this reason. Until now, treasury bills were available in only two maturities: 91 days and 364 days. The 182 day variety, which was available earlier, was discontinued two years ago.

A major feature of the new instrument, according to market sources, is that it closely coincides with the call money cycle. As the reporting day for cash reserve requirement (CRR) requirement falls on alternative Friday, constituting a 14-day cycle, the new treasury bill provided bankers with a suitable option to take care of their temporary surplus money. Banks can park their temporary cash surpluses in this instrument and exit from it after 14 days, which will be in keeping with their CRR cycle.

 

The major benefit of this paper, as market experts see it, is that it will fill a long-felt vacuum in the market. Since the 91 day treasury bill was the minimum maturity available, banks were short of investment options for periods less than 91 days. Call money was the only option worth considering. But call money investment was in most cases not for more than two to three days. The new paper will complete the yield curve, says a primary dealer.

The credit policy of April 1997 saw the initiative towards evolution of a term money market. Removal of CRR on inter bank liabilities was expected to herald a long term yield curve. While this served the purpose at the longer end, the vacuum at the shorter end was yet to be attended to. This has now been done with the introduction of 14 day treasury bills. And to provide a smooth yield curve, the RBI is planning to introduce some other maturities too - probably of 28 days.

Market circles are enthusiastic about this instrument for one more reason. It affords an alternative to repos. The RBI has been continuously resorting to the repo operations with a view to sucking away the excess liquidity in the system, which arises mainly out of its sterilisation operations. The response rate to repo operations has been quite erratic, and varies according to the liquidity perception of the market. Repos also involve a lot of paper work, involving buying and selling of repos. The 14 day treasury bill is free of such hassles and therefore some players find it better than repos.

Since the 14 day treasury bill will be issued every week, traders expect the trend in yield rates to be by and large predictable - between call rates and the yield on 91 day treasury bills. While this will help them in the bidding process, it will also have one other major benefit. The rate will become a benchmark for the short term market and will help as a reference rate for other instruments like commercial paper. For example, commercial paper of 30 days can now take this rate as the basis and build over it. Pricing of short term papaer will now be easier, is how one player explains this.

Also, since the 14 day treasury bill will be issued every week, it will serve as a seven day paper for investors who require this kind of maturity. Being a short term paper, it is unlikely to face any problem as far as liquidity is concerned.

Earlier, the RBI had introduced 14 day treasury bill in April 1997 where the eligible investors were state governments, foreign central banks and other specified bodies. Local banks were excluded from the perview of the scheme. That lacuna has been done away with in the present scheme.

Under the new scheme, the results of the first auction on last Friday found banks going off the track in their yield expectations. Of the 48 banks bidding, only 21 banks found their bids being accepted at a yield of 4.96 per cent. The RBI accpted bids worth Rs 1114 crore while Rs 160 crore worth of bills devolved on the primary dealers. Market sources however said that banks may take a little time to get familiar with the new instrument and achieve more success in their bidding.

From the point of the central bank, the instrument makes immense sense. Considering that it could mop up Rs 1274 crore equivalent of liquidity from the market in the very first auction, it could use the 14 day treasury bills with success in the future in its mopping up operations. At the same time, the yield curve now looks much more complete and smoother than before. The 3 day repo last week yielded a rate of 4.15 per cent, followed by the 14 day treasury bill at 4.96 per cent, 91 day treasury bill at 6.77 per cent and 364 day treasury bill at 8.98 per cent. The RBI has thus taken the market one more step further in its development.

A major weakness of this variety of treasury bills is that they are not eligible for repo facility. There seems to be no apparent reason as to why the Reserve Bank of India should not have allowed this facility to market players and investors in the 14 day treasury bills. But as has always been witnessed, the central bank moves one step at a time.

Even corporates will find it attractive to invest their temporary cash surpluses in the new instrument. A few corporate treasuries are already active on this front, and many more may join the crowd to avail the benefit of short term investment option. Nonetheless, one concern of money market players is the timing of auction of the 14 day and 91 day treasury bills. Both auctions are held on reporting Fridays, when banks are busy calculating their CRR requirements.

The RBI could examine the possibility of shifting these auctions to some other day of the week. Another possibility as perceived by the market is that with the oncoming of the 14 day variety, the 91 day treasury bill may become redundant and there would in due course be few takers for them - just what happened in case of 182 day variety.