The Reserve Bank of India (RBI) rejected all bids at Wednesday's ₹23,000 crore treasury bill auction, indicating resistance to sharply rising short-term government borrowing costs, according to bond market dealers.
The benchmark 10-year government bond yield climbed to 7.44%, its highest since Nov 4, 2022, compared with 7.39% in the previous session.
The government had planned to raise funds through 91-day, 182-day and 364-day treasury bills (T-bills). As per a report by Business Standard, traders said investors may have demanded yields exceeding the central bank's acceptable levels.
Treasury Yields Pressure Bond Market
The auction cancellation added to selling pressure on government securities amid higher crude oil prices and rising US Treasury yields.
A primary dealership official warned that the benchmark bond yield could approach 7.50%, with Brent crude trading near $112 per barrel.
The RBI previously rejected bids for 182-day and 364-day bills in June and cancelled auctions across all three maturities in March.
Short-term yields have increased substantially over recent weeks.
Between Sept 9 and Oct 14, yields on 91-day, 182-day and 364-day bills rose by 64, 83 and 69 basis points, respectively.
At the preceding auction, their cutoff yields stood at 5.73%, 6.29% and 6.49%.
The spread between the one-year treasury bill yield and the policy repo rate widened to 99 basis points, its highest in four years.
Tightening Liquidity Drives Demand For RBI Funding
The central bank raised its repo rate to 5.50% this month and adopted a calibrated tightening stance.
Market participants are increasingly anticipating another 50-basis-point increase in December.
Meanwhile, banking system liquidity has tightened, although RBI data showed a net surplus of approximately ₹48,303 crore on Tuesday.
Demand for overnight variable rate repo (VRR) funding reached ₹93,241 crore against the notified ₹50,000 crore.
The weighted average call rate settled at 5.64% on Wednesday, compared with 5.66% previously.
The RBI also conducted a ₹1 lakh crore VRR auction on Monday, its first in three months.
A state-owned bank dealer attributed elevated overnight borrowing rates to reduced liquidity and upcoming tax outflows, prompting temporary RBI liquidity support.
