Here's Why The RBI Doesn't Want Your Money
This is the first time this has happened in more than seven years.
The Reserve Bank of India (RBI) has rejected all the bids it received for its latest auction of 91-day treasury bills – totalling more than five times the Rs 9,000 crore on offer. This is the first time this has happened in more than seven years.
Because?
Central banks are notoriously tight-lipped and the RBI is no exception. While no official reason has been provided, bond traders say the probable reason was that the cut-off yield on the 91-day T-bill was higher than the expected level of around 7.15 – 7.20 per cent. Short-term treasury bills – like the ones up for sale which would have matured in 91 days – bear no interest. However, they are usually sold at less than face value. The difference between the face value (on maturity) and the purchase price is the yield, which gives us the implicit interest rate.�
Why does it matter?
The fact that the market was unwilling to settle for a yield within the RBI's comfort range – the previous auction of 91-day T-bills fetched a cut-off yield of 6.73 per cent – means two things. One, there is not enough liquid cash floating around within the system. Whe...
The Reserve Bank of India (RBI) has rejected all the bids it received for its latest auction of 91-day treasury bills – totalling more than five times the Rs 9,000 crore on offer. This is the first time this has happened in more than seven years.
Because?
Central banks are notoriously tight-lipped and the RBI is no exception. While no official reason has been provided, bond traders say the probable reason was that the cut-off yield on the 91-day T-bill was higher than the expected level of around 7.15 – 7.20 per cent. Short-term treasury bills – like the ones up for sale which would have matured in 91 days – bear no interest. However, they are usually sold at less than face value. The difference between the face value (on maturity) and the purchase price is the yield, which gives us the implicit interest rate.
Why does it matter?
The fact that the market was unwilling to settle for a yield within the RBI's comfort range – the previous auction of 91-day T-bills fetched a cut-off yield of 6.73 per cent – means two things. One, there is not enough liquid cash floating around within the system. When the system is short of liquidity, fund owners – typically banks and financial institutions like mutual funds which participate in T-bill auctions – expect a higher yield as demand elsewhere is high. And two, they expect interest rates to go higher, at least in the near term.
Why should I care?
Tight liquidity means that all borrowers – and not just the Government Of India, on whose behalf RBI issues treasury bills – will be forced to fork out higher interest rates. And the fact that the market expects interest rates to trend higher means that inflation is likely to stay high.
