RBI Rejects All T-Bill Bids as 10-Year Yield Hits 7.44%

The Reserve Bank of India rejected every bid at Wednesday’s ₹23,000 crore Treasury bill auction, even though investors bid more than the notified amount. The 10-year government bond yield closed at 7.44%, its highest since November 2022.

What Happened at the October 21 Auction

The government planned to raise ₹23,000 crore through 91-day, 182-day and 364-day Treasury bills (T-bills), which are short-term government debt instruments. The RBI, which runs the auction, accepted no competitive and no non-competitive bids across the three maturities. Dealers told Business Standard that investors may have asked for yields above what the RBI was willing to pay.

The rejection did not happen because of weak demand. Competitive bids exceeded the notified amount in every tenor, according to RBI auction results reported by ANI.

Non-competitive bids of ₹12,028.76 crore, ₹1,712.42 crore and ₹1,683.57 crore were also received for the three tenors, and none was accepted.

Why Short-Term Yields Alarmed the RBI

Cut-off yields on T-bills have climbed sharply over five weeks. Between September 9 and October 14, yields on 91-day, 182-day and 364-day bills rose by 64, 83 and 69 basis points respectively. At last week’s auction, the government raised money at 5.73% for 91-day bills, 6.29% for 182-day bills and 6.49% for 364-day bills.

The spread between the 364-day T-bill yield and the RBI’s policy repo rate widened to 99 basis points last week, its highest in four years. The central bank raised the repo rate to 5.50% this month and shifted to a stance of calibrated tightening. The RBI had previously rejected bids in June, when it cancelled the 182-day and 364-day auctions, and in March, when bids were rejected across all three maturities.

The 10-Year Bond Yield Moves Higher

The benchmark 10-year government bond yield settled at 7.44% on Wednesday against 7.39% on Tuesday. Business Standard reported that this was the highest level since November 4, 2022. The yield has risen around 20 basis points since the October 7 policy announcement.

Government bonds were already under pressure from rising crude oil prices and higher US Treasury yields, and the auction result added to the selling. A dealer at a primary dealership said the 10-year yield could move toward 7.50%, and described crude as the main overhang. The dealer added that sentiment turned negative again after the auction result was announced, and Business Standard reported that bets on a 50 basis point hike in December are growing.

Liquidity Has Tightened Quickly

The turn in system liquidity is sharp. Net liquidity in the banking system stood at a surplus of about ₹48,303 crore on Tuesday. The RBI had been in absorption mode from August 6, and its average daily net absorption rose from ₹1.2 trillion in July to ₹5.8 trillion in August. On October 12 it absorbed a net ₹3.36 trillion, when the call rate stood at 5.41%.

A dealer at a state-owned bank said liquidity has almost dried up and tax outflows are still due, which is why the RBI is running temporary infusions to keep overnight rates aligned with the repo rate. The central bank plans another overnight variable rate repo auction of ₹50,000 crore on Thursday.

Also Read: RBI MPC Minutes: Rate Cuts Off the Table, Two Dissent on Stance

What the Auction Signals

When the RBI rejects every bid, the government does not raise any money through that auction, so the ₹23,000 crore it planned to borrow through bills has to be raised in later sales. Business Standard described the rejection as a sign of discomfort with the rise in short-term borrowing costs. That reading comes from dealers and traders and not from an RBI statement.

Bond prices and yields move in opposite directions, so a rising 10-year yield means existing government bonds are losing value. That matters to banks, which hold large amounts of government securities, and to borrowers, because the government’s borrowing cost influences lending rates across the economy.