The Reserve Bank of India has accepted treasury bill cut-off yields 20 basis points higher than the previous successful auction, after canceling the auction last week. According to The Economic Times, treasury bills jumped to their highest level in nearly two years, as near deficit liquidity and high oil prices have sealed another 50-75 basis points hike. The 10-year benchmark bond yield closed at 7.44% on Wednesday, continuing the sharp 30 basis points surge in October that has brought yields close to the critical 8% level not seen since 2018. This latest development reflects the RBI's response to intensifying market pressures from elevated crude prices and liquidity constraints.
Axis Bank's macroeconomic outlook has shifted significantly as the bank warns that inflation may be looking sustainably higher going forward. As reported by Axis Bank, this represents a meaningful change from the past two years when India's inflation consistently ran below the RBI's 4% target. Retail inflation has climbed to 5.54% in September from 4.83% in August, marking a notable shift in the inflation trajectory that could influence monetary policy decisions.
According to Axis Bank's analysis, three primary factors are driving the yield increase. Brent crude oil prices have surged above $115 per barrel, approaching four-year highs, with reports suggesting the US has asked Gulf nations to prepare for a fresh campaign against Iran. The Reserve Bank of India raised the repo rate by 25 basis points to 5.50% on October 7, marking the first hike in years and shifting to calibrated tightening. Additionally, banking system liquidity has tightened markedly towards a zero position, with festive-season cash withdrawals and RBI's dollar sales to defend the rupee pulling money out of banks. As per The Economic Times, system liquidity has hovered at a surplus of around ₹35,000 crores, down from a large surplus last month, with the daily average surplus in October standing at ₹2.6 lakh crore versus ₹7.8 lakh crore in September.
Market participants report that system liquidity fell sharply to ₹30,419 crore on Tuesday from a record ₹11 lakh crore on September 6, as reported by The Financial Express. According to The Economic Times, liquidity tightening and high oil prices have intensified short-term funding pressures, prompting traders to demand a higher liquidity premium and triggering higher yields in the t-bill market. The RBI Governor Sanjay Malhotra reiterated that monetary policy is primarily aimed at maintaining price stability, though it could be deployed for financial stability in some circumstances. The rupee has weakened further against the dollar, prompting fears of aggressive policy tightening by the RBI.
The yield surge is increasing government borrowing costs and impacting banks' treasury portfolios through mark-to-market losses. As reported by The Financial Express, with yields hardening and pressure expected to persist, some banks are recalibrating their trading books to limit further losses. A treasury head at a private sector bank confirmed they have exited fully from their HFT book and now hold only short positions. Market participants expect the pressure to persist as long as crude oil remains elevated and investors continue demanding a risk premium amid ongoing global uncertainty. Guara Sengupta from IDFC FIRST Bank expects the 10-year G-sec yield range to be between 7.40% and 7.60% in the near-term.
