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Informist, Thursday, Oct. 3, 2024

 

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--91-day T-bill auction cut-off yld below repo rate, 1st time since Apr 2022
--Dealers: 91-day T-bill cut-off rate below repo rate on Dec rate cut hopes
--Dealers: 91-day T-bill cut-off rate below repo rate on surplus liquidity
--Dealers:91-day T-bill cut-off rate below repo rate on lower supply Oct-Dec
 

By Aaryan Khanna

 

NEW DELHI – The Reserve Bank of India on Thursday set the cut-off yield on the 91-day Treasury bill below the repo rate for the first time since Apr. 27, 2022. At the auction on Thursday, the cut-off yield for the shortest-tenure T-bill was set at 6.4739%--the lowest in over 20 months--and below the policy repo rate of 6.50%. The last time the RBI set the cut-off below the repo rate was before the RBI's Monetary Policy Committee hiked rates by 40 basis points to 4.40% in an unscheduled meeting on May 4, 2022.

 

On Thursday, market participants bid aggressively at the T-bill auction, with the lowest cut-off estimate for the 91-day T-bill being 6.44%, as per an Informist poll. This, according to dealers, reflected expectations of easing liquidity conditions as well as those of a repo rate cut being not too far away. Market participants see a chance of the rate-setting panel softening its language on inflation or even changing its stance to neutral from the withdrawal of accommodation at the conclusion of its three-day meeting on Oct. 9.

 

Bets on a rate cut in December are already being placed in the secondary market for T-bills and government securities. Further, banking system liquidity has been in surplus for most of Jul-Sept. The easier liquidity conditions and the fall in money market rates have occurred in the absence of any matching commentary or action by the central bank, suggesting an unofficial comfort with market-determined yields falling, dealers said. The surplus liquidity in the banking system rose to INR 2.13 trillion on Wednesday, the most since Sept. 6.

 

"Overnight tri-party repo rates have been fluctuating around the repo rate and often dipping below it, indicating that the RBI has indirectly eased liquidity conditions," said V.R.C. Reddy, head of treasury at Karur Vysya Bank. "Market expectations suggest that the RBI will change the stance to neutral or at least will send dovish signals (next week), which has led to T-bill rates being priced in accordingly."

 

In addition to rate expectations, supply-demand dynamics for T-bills have also prompted a fall in yields across maturities. The cut-off yields on 91-, 182-, and 364-day T-bills were set 16-18 bps lower than the previous auction on Sept. 11. The central bank cancelled two T-bill auctions worth INR 400 billion that were scheduled for Sept. 18 and Sept. 25. On Sept. 26, the government said its gross T-bill issuances in Oct-Dec would be INR 2.47 trillion, about INR 350-450 billion lower than market estimates. With supply low, there was robust replacement demand from banks at Thursday's auction, dealers said.

 

"It can't only be seen from the rates' perspective," said Naveen Singh, head of trading at ICICI Securities Primary Dealership. "Net T-bill supply is negative in Oct-Dec, and banks would need to shore up investments in short-term instruments, while mutual funds could also have some demand in buckets which require investments below 91 days or only in T-bills."

 

Despite the favourable conditions for lower yields, some sections of the market were unwilling to bid more aggressively at the auction Thursday. According to them, the cut-off on the 91-day T-bill is unlikely to remain below 6.50% if the MPC refrains from giving a signal on the start of its easing cycle next week.

 

"The market was expecting the cut-off yield to be somewhere around 6.43% (on the 91-day T-bill). However, it wasn't that aggressive due to little participation from mutual funds," a dealer at a primary dealership said. "This is the reason why the cut-off was higher (than expectations)." The cut-off yield, at 6.47%, was slightly higher than the 6.45% cut-off yield seen in the Informist poll.

 

The flare-up in tensions in West Asia and the prospect of a wider regional war also pushed some investors out of the market on Thursday, dealers said. Iran bombed Israel late Tuesday in retaliation for the latter's attacks on Lebanon.  End

 

With inputs from Cassandra Carvalho

Edited by Saji George Titus

 

 

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