India's short-term rates hit 1-1/2-year low after govt cancels T-bill auctions

Short-term treasury bill rates dropped to their lowest levels in nearly a year and a half after an unprecedented cut in treasury bills supply boosted prospects of higher systemic liquidity and demand for debt, traders said.

On Thursday, the Reserve Bank of India cancelled two treasury bills auctions worth Rs 20,000 crore ($2.38 billion) each, scheduled for this month.

Traders said such a move is unparalleled with cancellations earlier being done only on auction days largely due to the central bank's discomfort with rates.

The borrowing cut comes at a time when the liquidity situation is expected to tighten on the back of tax outflows scheduled over the coming week, with possible outflows of nearly 2.5 to 3 trillion rupees from the banking system.

The drop in short-term rates will also benefit companies and banks looking to raise funds via commercial papers and certificates of deposits at quarter-end.

The yield on 91-day T-bills fell to 6.55 per cent, its lowest since January 2023, and is only 5 basis points above the RBI 's key policy rate - its lowest spread since May 2022. Yields on 180-day and 364-day bills fell 5-6 basis points each.

The government's borrowing via T-bills in the current quarter stands at Rs 3.24 lakh crore, including the heavy bidding seen from the non-competitive segment comprising largely of state governments. It has surpassed the planned borrowing of 2.6 trillion rupees.

The outsized demand for 91-day papers, including the non-competitive segment at 195 per cent of the July-September calendar, could prompt a larger trimming into the third and fourth quarter, said Siddharth Kothari, an economist with Sunidhi Securities.

The supply of 182-day and 364-day papers could be elevated to align net reduction, Kothari said.

The additional liquidity is likely to chase bonds across segments, with the RBI rate cut likely in December, said Mataprasad Pandey, vice president at financial advisory firm Arete Capital.