In a first in 7 years, RBI rejects all bids for 91-day Treasury bill 

In a first in 7 years, RBI rejects all bids for 91-day Treasury bill 

Subject: Economy

Section: Financial Market

What are T BILLS?

• The government raised fund from financial market in two ways: 1) T bills (treasury bills). 2) Government Bonds.
• Treasury bills are typically short-term borrowing tools, with a maximum tenure of 364 days, and available at a zero-coupon rate of interest. These bills are issued at a discount to the published nominal value of government securities (G-secs).
• The Government of India issues treasury bills as a type of money market instrument that functions as a promissory note, guaranteeing repayment at a later date.
• T-bills are the instruments for raising fund by the government for the short-term up to a year.
• These bills are issued by the Central government only and interest rate is determined by the market forces. It is issued at a discount to original value and the buyer gets the original value upon maturity. For example, a Rs 100 treasury bill can be availed of at Rs 90, but the buyer is paid Rs 100 on the maturity date.
• They are issued via auctions conducted by the Reserve Bank of India (RBI) at regular intervals. Individuals, trusts, institutions and banks can purchase T-Bills.
• The returns on T-bills are influenced by the liquidity as well. When there is liquidity crisis than the yield is higher on the T-bills.
• It is considered a very safe financial instrument for zero-risk weightage attached to it.
• Banks give treasury bills to the RBI to get money under repo. Similarly, they can also keep it to fulfil their Statutory Liquid Ratio (SLR) requirements.
• Treasury bills, or T-bills, have a maximum maturity period of 364 days and thus called money-market instruments.
• Currently they are issued in three maturities: 91-day, 182-day and 364-day (earlier 14-day bill was also issued).
• T-bills are available for a minimum amount of Rs.25,000 and in multiples of Rs. 25,000.
• The 91-day T-bills are auctioned every week on Friday and 182-day and 364-day T-bills are auctioned every alternate week on Wednesdays. The Reserve Bank of India issues a calendar of T-bill auctions.
• Government paper with tenor beyond one year is known as dated security. At present, there are dated securities with a tenor up to 20 years in the market

Why did RBI reject all bids?

• According to the market participants, most investors sought higher cut-off yields, which were almost closer to the cut-off yield on the 182-day T-Bills, hence RBI rejected all bids. Some dealers said investors were bidding in the range of 7.15-20 percent on these papers.

Why did investors demand higher yields?

• According to money market dealers, some mutual funds were facing redemption pressure in their liquid funds. Hence, they sold T-Bills at a higher yield in the secondary market leading to higher demand for cut-off yield in the auction.
• The redemption pressure surfaced after a few investors started moving their funds from liquid funds to duration funds, said another bond dealer at a state-owned bank.

How many bids were received?

• During the auction, 91-day T-bills received 154 competitive bids worth Rs 45,949.50 crore and 10 non-competitive bids worth Rs 880.711 crore, as per the full auction result release. The notified amount for the security was Rs 9,000 crore.

What was the cut-off on other securities?

• The central bank set a 7.2820 percent cut-off yield on 182-day T-Bills and a 7.3064 percent cut-off yield on 364-day T-Bills. It accepts the full amount on 182-day and 364-day T-Bills.
• On the 182-day T-Bill, the central bank received 156 competitive bids worth Rs 50,558 crore, and it accepted 43 bids worth Rs 15,963.568 crore.
• Similarly, on the 364-day security, the central bank received 140 competitive bids worth Rs 35,745 crore, while it accepted 40 bids worth Rs 13,980.482 crore. It accepted the remaining amount through non-competitive bids on both securities.