India Inc, fund houses rush to short-term treasury bills

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Wednesday’s auction sees Rs 6,021 crore non-competitive bids

With banks reluctant to take in bulk deposits, the rush for short-term treasury bills has intensified from mutual funds, insurance companies and large corporate entities.

At Wednesday’s Treasury bill auctions, non-competitive bids at the auctions were Rs 6,021 crore. Bids at the Treasury bill auctions from entities other than banks and primary dealers are categorised as non-competitive bids. The non-competitive bids were more than the notified amount of Rs 5000 crore. With the huge response from the non-competitive bidders, the amount retained by the RBI was Rs 11021 crore.

As a result, despite the beginning of the advance tax payment season, treasury bill yields remained soft at 8.18 per cent. Normally, it is during the advance tax payments season that cash tightens in the banking system. The tight cash in turn leads to sharp increases in the yields on 91 day treasury bills and other short term instruments.

Canara Bank’s chief economist, Manoranjan Sharma said, “Since banks don’t require bulk funds at the moment, in an environment of weak credit, the best place to park funds is in Treasury bills.” However, the increase in treasury bill retentions would result in increasing the government’s short term liabilities.

Since the beginning of October this year, non-competitive bidders have parked nearly Rs 45,000 crore in 91 day Treasury bills. With banks and primary dealers parking another Rs 50,000 crore in the bills, the gross resources mopped up through this route has already exceeded the target fixed for the third quarter by Rs 30,000 crore. The RBI’s third quarter 91 day Treasury bill resource mobilisation target was Rs 65000 crore.

Public sector banks have reduced their bulk deposit resource mobilisation, partly to comply with the government’s March 31 deadline. The government in a directive in July this year had directed all public sector banks to reduce their bulk deposits to just 15 per cent of their aggregate deposits. But the government definition of bulk deposits includes all funds raised at interest rates above the card rates of the banks.

Mutual funds, insurance companies and large corporates were still holding back investments, given the adverse economic environment. The preferred safe haven investment remained either Treasury bills or bank deposits. In fact, the bank official said that the redeemed resources were returning to banking system at below card rates.

This was apparent from the fall in steep drop in the certificates of deposit rates. Six months ago CD rates had remained above 9 per cent consistently. CD rates for three months are just 8.3 per cent or well within the card rates offered by the banks. PSU banks presently offer a maximum of 8.5 per cent for tenors of up to one year.

PSU bank officials said that they already have ample cash with them. This was in view of their large holdings of government securities. The surplus holdings of government securities gave the banks cushion to borrow as much as Rs 5 lakh crore from the RBI’s overnight cash support window.

Besides, with the beginning of the open market operations by the RBI, the cash with the public sector banks was further expected to increase. BNP Paribas Wealth Management senior vice president fixed income, Joydeep Sen said, “If government expenditure does not pick up the RBI would be expected to do a series of Open market operations.” Open market operations implied outright purchase of securities by the RBI against cash.

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