RBI Rejects All Bids At ₹23,000 Crore Treasury Bill Auction As 10-Year Bond Yield Hits Nearly Four-Year High Of 7.44%

The Reserve Bank of India (RBI) rejected all bids at the government’s ₹23,000 crore treasury-bill (T-bill) auction on Wednesday, as investors sought higher returns on short-term government debt. The decision came amid rising borrowing costs, tighter banking system liquidity and continued selling pressure in the government bond market.

The benchmark 10-year government bond yield climbed to 7.44%, its highest level since 4 November 2022. It had settled at 7.39% in the previous session. The government had planned to raise ₹23,000 crore through the sale of 91-day, 182-day and 364-day T-bills.

Dealers said the yields demanded by investors may have exceeded the RBI’s expectations, prompting the central bank to reject the bids. The auction outcome added to the pressure on government bonds, which have already faced selling due to rising crude oil prices and higher US Treasury yields.

T-Bill Yields Climb Sharply

Short-term government borrowing costs have risen considerably over the past five weeks. Between 9 September and 14 October, yields on 91-day, 182-day and 364-day T-bills increased by 64 basis points (bps), 83 bps and 69 bps, respectively.

At last week’s auction, the government raised funds at yields of 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 bps last week.

This was the highest gap in four years, reflecting the increase in short-term borrowing costs. The central bank last rejected T-bill bids in June, when it cancelled auctions of 182-day and 364-day bills. At the end of March, it had rejected bids across all three maturities.

RBI Tightening Policy Amid Liquidity Shift

The RBI raised the repo rate to 5.50% this month and shifted its monetary policy stance to calibrated tightening, signalling the possibility of further rate increases. Market expectations of a 50 bps hike in December have also grown.

The 10-year government bond yield has risen around 20 bps since the policy announcement. Banking system liquidity has tightened sharply after supporting the market for much of the year. The RBI’s latest data showed a net liquidity surplus of around ₹48,303 crore on Tuesday.

Demand for overnight funds remained strong. Bids at the RBI’s variable rate repo (VRR) auction totalled ₹93,241 crore against the notified amount of ₹50,000 crore.

The weighted average call rate (WACR), the operating target of monetary policy, settled at 5.64% on Wednesday, compared with 5.66% in the previous session. The rate remained close to the marginal standing facility rate.

RBI Steps Up Liquidity Support

The RBI conducted a ₹1 trillion VRR auction on Monday, its first in three months. It has scheduled another overnight VRR auction worth ₹50,000 crore for Thursday.

The shift follows a period of abundant liquidity. The RBI had remained in absorption mode since 6 August, after its last VRR auction on 29 July, as foreign currency non-resident bank (FCNR(B)) deposit swaps had added liquidity to the system.

Average daily net absorption under the liquidity adjustment facility rose from ₹1.2 trillion in July to ₹5.8 trillion in August. On 12 October, the RBI absorbed a net ₹3.36 trillion, while the call rate stood at 5.41%. The daily cash reserve requirement was tightened from 16 October, adding to the change in liquidity conditions.

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