The RBI, which manages the government's debt, held a sale of treasury bills that was slated to raise 230 billion rupees and ended up accepting none of the bids. The central bank said no bids had been accepted and did not give a reason. It is the first full cancellation of a T-bill sale since late March, making it the first such occurrence in seven months.
A wider rout in bonds has lifted financing costs to their highest levels in years. The 10-year benchmark yield has climbed roughly 24 basis points this month and on Wednesday reached its highest level since March 2023. Pressure has been even heavier on shorter maturities, with the five-year yield up 30 basis points since the end of September. Elevated oil prices are adding to inflation risks in India and increasing the chances of further monetary tightening by the RBI.
"A probable reason for the rejection is that the bids would have been at higher yields," said Rajeev Pawar, head of treasury at Ujjivan Small Finance Bank. He added that talk of more RBI rate hikes is weighing on shorter-maturity notes. PGIM India Mutual Fund's Puneet Pal, who leads fixed income, said that with heavy selling in longer-dated bonds, returns on treasury bills may continue to move higher.
At the same time, the RBI has been pulling excess cash from the system to contain inflation risks tied to surplus liquidity. Since last month it has drained more than 1 trillion rupees through bond sales and carried out large-scale foreign exchange swaps to absorb funds from a diaspora deposit program. Banking-system surplus liquidity stood at 570 billion rupees on Oct. 20, well below about 5 trillion rupees at the month's start.
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In plain English: higher yields mean lower bond prices, and the move has been sharpest in shorter tenors that react fastest to rate expectations. With oil-fueled inflation risks and talk of RBI tightening in the mix, shorter-maturity notes have taken the bigger hit, and, as Puneet Pal notes, T-bill yields could reset higher too. Add the RBI's liquidity withdrawal to the backdrop, and funding conditions are tighter than they were at the start of the month, which can keep near-term yields elevated.
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