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Informist, Wednesday, Apr. 16, 2025

NEW DELHI – While overnight indexed swap rates have long reflected further rate cuts, funded instruments such as the Treasury bills are often late to show a definite rate cut trajectory. The government's shortest tenure borrowing costs have slipped comfortably below the repo rate, a reflection that traders are willing to pass on the benefits of their expectations to the exchequer, according to bond market dealers.

The cut-off yield for the 91-day T-bill auctioned Wednesday was set at 5.9354%, the lowest since September 2022, and below the policy repo rate of 6.00%. The cut-off yields on the 182-day and 364-day T-bills were just above the repo rate, and also at their lowest since 2022. 

The results come a week after the Reserve Bank of India's Monetary Policy Committee unanimously cut the repo rate and changed the panel's policy stance to 'accommodative' from 'neutral', indicating only rate cuts or status quo going ahead. Traders expect a repo rate cut of 25 basis points in the June monetary policy review, with hope of the next rate cut split between August and October.

"Today's cut-offs are actually a bit surprising on the higher side, since everyone has a comfort with liquidity as well," a dealer at a primary dealership said. "But increasingly, the shorter end of the curve is very much showing that rate cuts are going to keep coming until we're at around 5.50% (repo rate)."

Latest RBI data shows the central bank net absorbed liquidity of INR 1.60 trillion from the banking system on Tuesday, which is a proxy for the systemic liquidity surplus. The RBI's systemic liquidity injections through gilt purchases under its open market operations are set to cross INR 4 trillion for the year in April, and it has also conducted dollar/rupee buy/sell swap auctions worth over $25 billion to infuse durable liquidity into the banking system.

Additionally, daily variable rate repo operations since January have kept overnight rates below the Marginal Standing Facility rate during the seasonal liquidity tightness in March. Banks' cost of funding their investments in instruments such as T-bills has fallen over 40 bps over the past month, with the weighted average call and triparty repo rates remaining well below the 6.00% mark this week. The confidence that this state of easy funding costs will persist also led traders to amp up their buys of short-term debt, dealers said.

The weighted average yield on the 182-day and 364-day T-bills was within a half basis point of 6.00%. Another reason for the aggressive cut-offs was the demand-supply mismatch in the segment, dealers said. While demand was strong on the view the RBI would ensure a systemic liquidity surplus, as promised by Governor Sanjay Malhotra on Apr. 9, supply in both the six-month and one-year papers had dropped to INR 50 billion each in the Apr-Jun quarter. In the past six weeks of Jan-Mar, the government sold INR 120 billion of the 182-day T-bill and INR 70 billion of the 364-day T-bill.

"Actually, there is greater preference for the longer-term T-bills also," a dealer at a private bank said. "You can see it in the bidding: nobody is shy about bidding right at the repo rate for them, because everyone knows they won't lose money."  End

Reported by Aaryan Khanna

Edited by Deepshikha Bhardwaj

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