The Reserve Bank of India accepted cutoff yields about 20 basis points higher in its latest treasury bill auction. The 91-day bill was set at 5.93%, the 182-day at 6.54%, and the 364-day at 6.69%. This followed a cancelled auction the prior week where yields were already 15 bps higher. The move signals a deliberate tightening of near-term liquidity, contradicting the rally in longer-dated government bonds that saw the 10-year yield drop 5 bps to 7.39%.
Mechanism of a squeeze
The higher T-bill yields act as a direct lever on short-term funding markets. They raise the benchmark for other short-term instruments like commercial paper and certificates of deposit. One-year commercial paper rates for AAA-rated NBFCs are already at 8.10%, up from 7.55% in April. This transmission occurs even as the RBI has injected funds via variable-rate repos to address acute cash shortages, with system surplus falling sharply to around ₹35,000 crore.
The immediate impact lands on banks and corporations that rely on the money market. Banks' funding costs rise, squeezing net interest margins if they cannot pass them on. For high-rated corporates, it has made bank loans relatively dearer, prompting a shift to the bond market where AAA-rated firms raised funds at 8.13-8.85% in October. This disintermediation pressures bank loan growth.
This tightening is a calibrated move. The finance ministry has stated that the efficacy of the recent 25 bps repo rate hike depends on active liquidity management. By allowing short-term rates to rise, the RBI ensures monetary policy transmits fully, aiming to curb secondary inflation effects. The condition for this stance to hold is that external supports for longer bonds—like softer oil prices and a US Treasury rally—do not reverse abruptly and undermine the overall tightening intent.