The yield on 91-day Treasury bills increases to its highest level in FY24

 The yield on 91-day Treasury bills increases to its highest level in FY24

The RBI reports that on October 25, the cut-off yield on the 91-day Treasury note reached its highest level of the fiscal year, 6.9349 percent. On November 1, it decreased to 6.9325 percent.

In the previous two weeks, the cut-off yield on the 91-day Treasury bill has reached its highest point in the current fiscal year. According to money market specialists, this is a result of the banking system's limited liquidity and changes in the returns on government assets.

The US Federal Reserve's policy and the increase in US Treasury bond yields have had a significant influence on global rates, putting continuous pressure on yields. The liquidity overhang has caused the short-term rates to increase even further, according to Resurgent India's managing director Jyoti Prakash Gadia.

The RBI reports that on October 25, the cut-off yield on the 91-day Treasury note reached its highest level of the fiscal year, 6.9349 percent. On November 1, it decreased to 6.9325 percent.

In a similar vein, the 182-day and 364-day cut-off yields increased and almost reached their greatest points in the final two weeks of this fiscal year.

The RBI indicated in the most recent monetary policy that rates will be high for a while and reaffirmed that neither deposit nor lending rate transmission has been entirely completed, according to V. Ramachandra Reddy, deputy general manager (treasury), Karur Vysya Bank. Liquidity is the weapon of choice for the RBI to maintain high rates.

That perspective is supported by the announcement of an OMO sale, an ongoing policy instrument. Interbank rates may have shifted after the policy, with the marginal standing facility (MSF) rate acting as the operational rate, Reddy said.

In the last few days, the yield on government securities has increased by 15–17 basis points (bps), particularly after the monetary policy announcement on October 6.

The yield on the benchmark 10-year government security is now 7.3303 percent.

One tenth of a percentage point is equal to one basis point.

What is shown by the data?

At the beginning of this fiscal year, the 91-day Treasury bill's cut-off yield was 6.9192 percent. After then, it stayed between 6.72 and 6.90 percent.

Similarly, so far this fiscal year, the cut-off yields on the 182-day and 364-day bills have stayed within the ranges of 6.80–7.17 percent and 6.85–7.21 percent, respectively.

According to Gadia, the 182-day and 364-day bond scenarios also point to the continuation of higher rates because of the ongoing inflationary trend, which was made worse by insufficient kharif sowing, which raised expectations for food prices, the likelihood of supply chain disruptions, and increases in oil prices during this time.

Situations of liquidity

The banking system's excess liquidity from the previous year began to decline as a result of actions taken by the central bank, including VRRR auctions and other instruments. Furthermore, there was a significant reduction of liquidity due to tax and other auction withdrawals.

However, the removal of banknotes having a face value of Rs 2,000 caused the system's liquidity to rise once again. In response, the central bank held a number of VRRR auctions in May, June, and July.

These auctions, however, were ineffective temporary solutions. Therefore, to eliminate excess liquidity from the banking sector, the RBI established the I-CRR in its August monetary policy.

There was still a shortage of liquidity in the banking sector even after the I-CRR was completely removed. On November 1, the deficit was around Rs 54,534.23 crore.

Prospects

Treasury bill yields are anticipated to remain higher in the next weeks until there is no adjustment in the yield on government securities, according to money market specialists.

Furthermore, Reddy of Karur Vysya Bank pointed out that there is now no rate rise regime in effect and that the 40 basis point spread above the existing operating rate—that is, the MSF rate—looks appealing for the six-month and one-year T-bills.