RBI Treasury Bill and Bond Auction Update: Short Yields Rise After RBI Decision; T-Bills’ Highest Yield 6.94%

Although the long-term government bond yields were stable, the short-term yields rose 8-10 basis points post the Reserve Bank of India’s monetary policy committee meeting on Friday, even as the overall Indian bond market remained volatile this week, an expert said.

“We expect the money market yields will remain volatile next week before settling down, as we hope the banking system liquidity to stay comfortable despite ICRR (incremental cash reserve ratio), says Venkatakrishnan Srinivasan, founder of Rockfort Fincap LLP, a financial advisory firm.

In Friday’s decision, while the central bank has kept the repo rate unchanged, it has asked all scheduled commercial banks, regional rural banks, primary (urban) co-operative banks, and all state co-operative banks to maintain an ICRR of 10 per cent with RBI.

The directive comes amid higher consumer inflation triggered by the El Nino weather event, rising crude oil prices, and the volatile rupee. Adds Srinivasan, “RBI has shown its intention to drain out the excess system liquidity to control inflation by announcing ICRR.”

Meanwhile, RBI announced the auction of the next lot of treasury bills and state development loans (SDL). The indicative yield of T-bills for three-month, six-month, and 354-day are 6.76 per cent, 6.92 per cent, and 6.94 per cent, respectively. Jammu & Kashmir, Uttar Pradesh, Bihar, Punjab, Manipur, Telangana, Kerala, and Goa will participate in SDL auctions this time. UP and Punjab are offering the highest interest rates for SDLs maturing in 2035 and 2036.

‘Good Time’ To Lock In FDs

Anshul Gupta, co-founder and chief investment officer at Wint Wealth, a debt asset platform for retail investors, says, “The RBI’s decision is aligned with the market expectations. It signifies that we are close to the end of the rate hikes cycle. The market has been pricing in rate cuts from February to April 2024. For retail investors, this is a good time to lock in their desired fixed-income allocation in bank FDs (fixed deposits).”  

Furthermore, Srinivasan adds that with the introduction of 10 per cent ICRR, the banking system liquidity is expected to be reduced by at least Rs. 1 trillion. As of Friday’s opening trade, the net surplus liquidity was Rs. 2.64 trillion.

On a review of the current liquidity conditions, RBI has decided to issue a directive under Section 42(1A) of the Reserve Bank of India Act, 1934, requiring all scheduled commercial banks, scheduled regional rural banks, scheduled primary (urban) cooperative banks, and scheduled state co-operative banks to maintain with the RBI an incremental (ICRR) of 10 per cent on the increase in Net Demand and Time Liabilities (NDTL) between May 19, 2023, and July 28, 2023. It will be effective from August 12, 2023. The ICRR will be reviewed on September 8, 2023 or earlier.  

Bond Market Trends

Srinivasan says the short-term yields were increased by at least 8-10 basis points due to the introduction of ICRR. The 10-year government bond yield closed at 7.20 per cent compared to last week’s closing at 7.19 per cent.  

On Friday, RBI also issued a new 10-year government bond for Rs. 14,000 crores. “The implicit yield at the cut-off for the new 10-year came at 7.18 per cent. The 10-year G-Sec is expected to trade range bound the entire next week, given the intermittent holidays,” he says.

Further, the state governments have offered to sell SDLs worth Rs. 13,200 crores, slightly lower than the scheduled indicative SDL calendar of market borrowing of Rs. 13,750 crores.

Gupta believes “The long-duration debt funds can also be a good (investing) strategy. As the interest yields start falling, the capital appreciation of these bonds can give good returns.”

Corporate Bond Market Updates  

This week saw notable Non-convertible debentures (NCDs)/bond issuances like IREDA, Jamnagar Utilities and Power, Sundaram Finance, Shriram Finance, Tata Projects, etc., as per Rockfort data.

“Next week, we can expect large NCD/bond issuances from REC and AP State Beverages Corporation, rated AA (CE) by India Ratings and is expected to offer attractive yields,” says Srinivasan.