Treasury Bill Yields Set to Rise in India After RBI’s Cash Move

Bond traders in India are bracing for higher Treasury bill yields at an auction on Wednesday after the Reserve Bank of India took its first step toward paring back on some of its pandemic relief measures.

The 182-day bill may fetch a yield of 3.45%, about 10 basis points higher than at last week’s auction, according to the median estimate of a survey of five fixed-income traders. The 190 billion rupees ($2.6 billion) sale would be the first sovereign auction since the RBI said late on Friday it plans to drain cash via a reverse repo operation.

“The cutoffs for the T-bills are expected to come in higher,” said Shrisha Acharya, a fixed-income trader at DCB Bank in Mumbai. The RBI acted as it wasn’t feasible to keep short-term overnight rates low for longer as that would weigh on banks’ credit pricing, he said.

The result of the treasury bill auction is expected to provide further evidence of upward pressure facing short-term rates after the yield curve flattened on RBI’s announcement. It may also provide cues on market expectation for the pace of the cash draining steps even as forecasts are for a staggered approach.

The cut-off yield on the 91-day bill is seen at 3.28% versus 3.30379% in the last auction while the 364-day note may be sold at 3.52% compared with 3.4681% last week, the survey showed.

India’s yield curve has already begun flattening. Yield on the 10-year bond was steady on Tuesday but the 5.15% 2025 bond yield rose four basis points to 5.24% after gaining 10 basis points in the previous session.

The RBI plans to drain 2 trillion rupees of banking funds via a 14-day reverse repo operation on Friday. Still, liquidity remains abundant at around 6.1 trillion rupees, according to the Bloomberg Economics India Banking Liquidity Index.

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