The RBI sold 91-day Treasury bills at a cutoff yield of 6.43%, seven basis points (bps) lower than the central bank’s repo rate of 6.50%.
BY THE NUMBERS
The inversion between the repo rate, an overnight rate, and the 91-day government treasury bill yield is at its widest since April 6, 2022.
On the other hand, the RBI sold 182-day and 364-day notes at 6.54% and 6.53%, bringing the spread with the policy rate to the narrowest in nearly three years.
WHY IT’S IMPORTANT
The fall in short-term rates shows the market is front-running expected rate cuts from the central bank, traders said. In the past, the RBI has shown its discomfort with short-term rates remaining below the policy rate and has acted to align them accordingly. While the central bank changed its policy stance to “neutral”, it did not give a clear indication of the timing of rate cuts.
CONTEXT
The central bank has sold bonds worth over 240 billion rupees ($2.86 billion) from July to September. It typically buys or sells bonds to align banking system liquidity and rates with monetary policy.
The daily average banking system liquidity surplus was above 1 trillion rupees in July-September and has jumped to 2 trillion rupees this month.
Traders said the RBI may not take any stringent steps to curb liquidity but could restart bond sales after taking a break in the last week of September.
KEY QUOTE
“We have had two cutoffs (on 91-day treasury bills) that have been below the repo rate and yields should remain around these levels as comfort on liquidity is giving confidence to markets that a rate cut will follow soon,” said VRC Reddy, treasury head at Karur Vysya Bank.