T-Bill yields ease by up to 7 bps in three weeks as liquidity conditions improve

The liquidity conditions in the banking system improved in the last few days after government spending kicked in on account of salaries, pensions, and infrastructure-related spends.

The yields on Treasury Bills (T-Bills) eased by up to seven basis points (bps) in the last three weeks following an improvement in liquidity in the banking system.

Data compiled from the Reserve Bank of India’s (RBI) website showed that the yield on the 91-day T-Bill eased by around 7 bps, the 182-day by over 1 bps, and the 364-day by around 3 bps.

One basis point is one-hundredth of a percentage point.

"The improvement in liquidity is reflected in the money market rates, including the T-Bills," said Ajay Manglunia, Managing Director (MD) and Head of Investment Group at JM Financial.

The liquidity conditions in the banking system improved in the last few days after government spending kicked in on account of salaries, pensions, and infrastructure-related spends.

The liquidity surplus, which was low at around Rs 25,000 crore as of August 24, increased to Rs 1.54 lakh crore as of September 6.

Also read: Norges Bank may vote against ICICI Securities delisting proposal as shareholders seek higher valuation

What does the data show?

The yield on the 91-day T-Bills eased to 6.8001 percent as of September 6, from 6.8781 percent on August 17, according to RBI data.

Similarly, the yield on the 182-day T-Bills fell to 7.0243 percent as of September 6 from 7.0385 percent as of August 17, and the yield on the 364-day T-Bills slipped to 7.0300 percent from 7.0692 percent during the same period.

On the other hand, the yield on the state development loans (SDLs) remained mostly unchanged compared to the week-ago period.

Why has liquidity increased sharply?

According to money market dealers, liquidity in the banking system usually improves in the first and last weeks of the month due to government spending.

As per market dealers, government spending is estimated to be around Rs 1 lakh crore.

This is further aided by the redemption of securities such as T-Bills and SDLs.

Also read: India’s growth outlook through the lens of bank credit

Future scenario

Liquidity is likely to increase in the coming days as money market experts expect the RBI to reduce the quantum of Incremental Cash Reserve Ratio (I-CRR) during its review, which may see it being extended beyond September 8.

"The RBI could use a combination of reduced I-CRR and shorter tenor VRRRs (less than 14 days) to ensure overnight rates stay between repo and MSF (marginal standing facility) rates," said Gaura Sengupta, India economist, IDFC First Bank, in a report on August 25.

She further added that I-CRR is expected to be completely withdrawn by October 2023.

On August 10, the central bank said that with effect from the fortnight beginning August 12, scheduled banks will have to maintain an I-CRR of 10 percent of the increase in their net demand and time liabilities (NDTL) between May 19 and July 28.

The central bank will review the I-CRR on September 8 or earlier with a view to returning the impounded funds to the banking system ahead of the festival season.