T-bill yields slump on expected rise in system liquidity

Mumbai: Borrowing costs for the Centre declined sharply during Wednesday's Treasury bill auctions on slumping yields after the move to withdraw ₹2,000 banknotes fuelled expectations of improved banking system liquidity.

At Wednesday's primary auction of Treasury Bills conducted by the Reserve Bank of India (RBI), cutoff yields on each of the three maturities of securities - 91-day, 182-day and 364-day - were set seven basis points lower than the previous auction.

The cutoff yield on the 91-day T-bill was set at 6.77%, that on the 182-day T-bill at 6.90% and that on the 364-day T-bill at 6.89%.


The government raises short-term borrowing through T-bills, which are used as pricing benchmarks for a variety of corporate debt instruments. T-bill yields are also included in the external benchmarks used by banks for pricing certain loans.

Demand for T-bills, particularly the shorter-tenure ones, is heavily driven by liquidity conditions in the banking system.

Traders said that the RBI's recent decision to inject liquidity through a 14-day variable rate repo operation as well as the step to withdraw the ₹2,000 notes had led to an improvement in the liquidity landscape.

"After the RBI announced the 14-day repo, the market became more confident on liquidity. For a few weeks before that, there was some liquidity stress in the system. The RBI's announcement eased that stress," Naveen Singh, head of trading at ICICI Securities Primary Dealership said.

"The second factor is the move on the ₹2,000 notes. While it is unclear how much the exact addition to liquidity will be, funds will flow into banks, and hence liquidity improves," he said.

The value of ₹2,000 notes in circulation as on March 31, 2023 was at ₹3.62 lakh crore, the RBI said.

Economists, however, broadly predict a range of ₹50,000 crore to ₹1 lakh crore as the quantum of ₹2,000 notes that would flow into the banking system.

Some of the ₹2,000 notes are already with banks while some would likely be changed to smaller denominations, economists said.