RBI rejects all bids at govt's T-bill auction as short-term yields surge

The Reserve Bank of India (RBI) on Wednesday rejected all bids at the government’s treasury-bill (T-bill) auction, signalling discomfort with the sharp rise in short-term borrowing costs, dealers said.

The yield on the benchmark 10-year government bond settled at 7.44 per cent, its highest level since November 4, 2022, against the previous close of 7.39 per cent.

The central bank last rejected bids in June, when it cancelled auctions of 182-day and 364-day T-bills. At the end of March, it had rejected bids across all three maturities.

The government had planned to raise ₹23,000 crore through the sale of 91-day, 182-day and 364-day T-bills. Traders said the yields sought by investors may have been higher than the RBI’s expectations. Government bonds, already under selling pressure due to rising crude oil prices and US treasury yields, were impacted further after the auction result.

“The yield (on the benchmark 10-year government bond) will now inch up to 7.50 per cent from here. Crude remains the main overhang, with Brent trading around $112 per barrel, and US yields have also inched up. That is a worry for the market. Sentiment turned negative again after the auction result was announced,” said a dealer at a primary dealership.

Cutoff yields on T-bills have risen sharply over the past five weeks. Between September 9 and October 14, yields on 91-day, 182-day and 364-day bills rose by 64 basis points (bps), 83 bps and 69 bps, respectively.

At last week’s auction, the government raised funds at yields of 5.73 per cent for 91-day bills, 6.29 per cent for 182-day bills and 6.49 per cent for 364-day bills.

The spread between the yield on 364-day T-bills and the RBI’s policy repo rate widened to 99 bps last week, its highest level in four years, reflecting rising short-term borrowing costs.

The central bank has turned decisively hawkish. It raised the repo rate to 5.50 per cent this month and shifted its stance to calibrated tightening, signalling the possibility of further increases.

Bets on a 50 bps hike in December are growing, while the benchmark 10-year bond yield has risen around 20 bps since the policy announcement.

Liquidity, which had cushioned the market for much of the year, has dried up. The RBI’s latest data showed that net liquidity in the banking system stood at a surplus of around ₹48,303 crore on Tuesday.

Consequently, the RBI’s overnight variable rate repo (VRR) auction witnessed strong demand, with bids amounting to ₹93,241 crore against the notified amount of ₹50,000 crore.

The weighted average call rate (WACR), the operating target of monetary policy, settled at 5.64 per cent on Wednesday, close to the marginal standing facility (MSF) rate, against 5.66 per cent in the previous session. On Monday, the RBI had conducted a ₹1 trillion VRR auction, the first in three months.

“Liquidity has almost dried up, keeping overnight rates elevated. We also have tax outflows coming. The RBI would like to keep overnight rates aligned with the repo rate. That is why it is conducting these temporary liquidity infusions,” said a dealer at a state-owned bank.

The turnaround in liquidity has been sharp. The RBI had been in absorption mode since August 6, following its last VRR auction on July 29, as liquidity had swelled due to Foreign Currency Non-Resident Bank, or FCNR(B), deposit swaps with the central bank.

Since then, the daily cash reserve requirement has been tightened from October 16. Average daily net absorption under the liquidity adjustment facility rose from ₹1.2 trillion in July to ₹5.8 trillion in August. As recently as October 12, the RBI absorbed a net ₹3.36 trillion, while the call rate stood at 5.41 per cent.

The central bank plans to conduct another overnight VRR auction worth ₹50,000 crore on Thursday.