By Dharamraj Dhutia
MUMBAI, – India’s ultra-short-term rates dropped further below the benchmark interest rate on Wednesday as the central bank easing its monetary policy stance boosted bets of imminent rate cuts and comfortable liquidity conditions added to demand.
The Reserve Bank of India 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.
GRAPHIC ($1 = 83.9260 Indian rupees)
(Reporting by Dharamraj Dhutia; Editing by Savio D’Souza)
