Heavy Bidding Pulls Down Interest Rates At India’s Treasury Bill Auction
Interest rates for short term government borrowings fell sharply on Wednesday, after an auction of treasury bills drew large bids.
On April 22, the government auctioned Rs 45,000 crore worth of treasury bills for which it received bids worth Rs 3.43 lakh crore. This implies a bid-to-cover ratio of 7.6 times. In total, the government accepted Rs 44,979 crore in bids through the auction.
As a result of the large volume of bids, the interest rates at which the government raised funds fell well below the policy repo rate of 4.4 percent. The repo rate is the rate at which banks can borrow overnight funds from the RBI. The reverse repo rate, at which the RBI absorbs excess funds, is set at 3.75 percent.
The yields at the treasury bill auction fell even below the reverse repo rate, with the 91-day bills being sold at an interest rate of 3.62 percent and the 182-day bills being sold at 3.65 percent.
Yields at Wednesday’s auction were also significantly lower than the previous auction, conducted on April 15, which also saw a large bidding interest from the market, BloombergQuint reported on April17.
A senior debt market banker, who works at a large primary dealership, told BloombergQuint that there is excess liquidity in the system which needs to find an outlet. This has led to increased bidding interest in treasury bills, which are of shorter duration and hold less risk of a sharp mark-to-market loss.
There is also a broad expectation that the RBI will cut its policy repo rate and provide more liquidity to the markets, which is driving the increased bidding at the treasury bill auctions, this person said on the condition of anonymity.
The government raised close to Rs 25,000 crore at the auction conducted last week and doubled the auction size this week to take advantage of the low rates.
So far the government has borrowed close to Rs 94,950 crore via treasury bills during the first three weeks of the current fiscal, compared to Rs 59,993 crore during the same period last year, according to RBI data.
The debt banker quoted above said that the government’s revenue deficit is expected to widen sharply due to Covid-19 related expenses. Given the general uncertainty, borrowing through longer-term government securities is costlier than borrowing via treasury bills. This is why the government is raising more debt through T-Bills along with long term bonds, this person said.