Mumbai: The number of large treasury bill trades has dropped sharply over the past two months, reflecting the sudden tightening in broader market liquidity that appears to have sapped investor interest in the most liquid of government debt instruments.
Until the week ended August 25, T-bill trades worth ₹1.1 lakh crore were carried out, with the average trades at ₹6,820.5 crore, Clearing Corporation of India Limited data show. The trades in July, which were 40% lower than those in August, were at ₹1.5 lakh crore with the average at ₹7,256.3 crore, the data showed.
The CCIL data includes over-the-counter trades, brokered deals and those struck in the Reserve Bank of India’s Negotiated Dealing System Order-Matching trade platform.
“In terms of numbers of trades where the single ticket is more than ₹1,000 crore, in May, there were 162 trades where the single ticket was more than ₹1,000 crore. In June, it shot up to 197. In July that falls back to 156 and in August it is 132 so far. In July and August, it seems that sudden interest from constituent entities has fallen sharply after a huge spike in June,” a treasury official at a mutual fund said on condition of anonymity.
The average trades in June were at ₹12,478 crore, data showed.
Some analysts cited increased investment in the quarter-end amid large surplus liquidity in the banking system in June as a factor that may have driven the trading interest. Anticipation of the government reducing the supply of T-bills in the second quarter to cool off elevated yields on such securities may have also spurred more transactions, analysts said.
“T-bills saw reduction in supply by ~25% as RBI has reduced the borrowing amount for T-bills from ₹32,000 crore per week in the 1st quarter to ₹24,000 crore in the second quarter. Additionally, due to June quarter end, trading volume is intended to see a sharp spike, and settle back in July, having a cascading effect,” analysts from CRISIL Market Intelligence & Analytics said.
Rising Yields
With the RBI having announced a temporary incremental Cash Reserve Ratio (ICRR) for banks earlier this month, a large portion of surplus funds have been impounded from lenders. The tighter liquidity conditions have eroded the trading interest in short-term instruments like T-bills, driving up their yields.
The RBI said that from the fortnight beginning August 12, banks have to maintain an ICRR of 10% on the rise in their deposits from May 19 to July 28. The measure has drained out funds worth around ₹1.1 trillion from the banking system.
Yields set at primary auctions of T-bills have risen sharply since the move. At the primary auction on August 23, the cutoff yields on 91-day, 182-day and 364-day T-bills were set 11, 13 and 9 basis points higher, respectively, than the auction conducted on August 9, which was prior to the RBI’s decision to impose the ICRR.
The rise in T-bill yields pushes up the cost of borrowing not only for the government but also corporate players as short-term debt instruments such as commercial papers and certificates of deposit are priced at a spread to government securities.
