Low demand from mutual funds: Reduced surplus liquidity pushes up yields on commercial papers, treasury bills

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The surplus liquidity in the banking system narrowed due to payments towards the advance tax and GST. Additionally, the Reserve Bank of India’s liquidity management operations played a vital role in reducing surplus liquidity.

By Manish M Suvarna

Yields on commercial papers (CP) and treasury bills (T-bill) maturing in three months rose by 10-15 basis points due to narrowing of surplus liquidity in the banking system and low demand from mutual funds.

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Currently, rates on papers issued by non-banking finance companies maturing in three months were between 3.70% and 3.75%, against 3.60% and 3.65% in the previous trading session. Rates on papers issued by manufacturing companies of similar maturities were hovering between 3.43% and 3.50%, compared to 3.35% and 3.40%.

The yields on T-bills rose more than 6 basis points in the last three weeks and during the latest auction, the central bank set a cut-off yield of 3.3439% on a 91-day T-bill.

“At the margin, surplus liquidity in the banking system came down due to the RBI’s reverse repos and payments towards advance tax, which led to a rise in yields on short-term papers,” Sandeep Bagla, CEO of Trust Mutual Fund, said.

The surplus liquidity in the banking system narrowed due to payments towards the advance tax and GST. Additionally, the Reserve Bank of India’s liquidity management operations played a vital role in reducing surplus liquidity.

Earlier this week, the central bank withdrew Rs 1.50 lakh crore through 7-day and 3-day variable rate reverse repo auctions. As of September 14, before advance tax payment, the surplus liquidity was Rs 8.46 lakh crore, and on September 22, it was estimated to be in surplus of around Rs 6.85 lakh crore.

According to a report of Kotak Mahindra Bank, outflows worth Rs 1.10 lakh crore and Rs 1 lakh crore were estimated towards the GST and advance tax, respectively. Other than this, there were regular outflows of auctions such as T-bills, state development loans and government securities.

Meanwhile, mutual funds, the largest investors in short-term debt papers, are facing redemption pressure and remained on the sidelines, which led to a rise in yields on these papers. Usually, during the end of the quarter, fund houses witness redemptions into their debt schemes, and hence they slow down their investments. “Fund houses sell more at quarter-end and buy less to accumulate funds for meeting outflows,” a dealer with a brokerage firm said.

Market participants expect yields to rise further if the central bank continues to withdraw excess surplus liquidity from the system. “However, if the market expects that the operational reverse repo rate could be hiked, that is when there would be significant movement of the short-term curve,” Bagla said.

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