Banking liquidity squeeze lifts short-term borrowing costs

A sharp narrowing of liquidity in the banking system following goods and services tax outflows has pushed up short-term money market rates over the past few days.

Data released by the Reserve Bank of India and compiled by PTI showed that cut-off yields on treasury bills rose by up to around 5 basis points or 0.05 percentage point in a week, while call money rates increased by 27 basis points during the same period.

The cut-off yield on the 91-day treasury bill auction held on Wednesday stood at 5.3542%, compared with 5.3324% on July 15.

Similarly, the 182-day treasury bill yield rose to 5.6098% from 5.5693% a week earlier, while the 364-day treasury bill yield climbed to 5.7650% from 5.7197%.

Market participants stated that the rise in short-term rates reflects a temporary tightening of liquidity conditions as goods and services tax-related tax payments drained funds from the banking system.

"The short-end part of the curve exhibits stickiness as system liquidity showed some degree of tightness. Going forward, we might see steepness of the yield curve continue unless the war situation resolves and international oil prices show some downward correction," Dipanwita Mazumdar, Economist at Bank of Baroda, stated in a note.-PTI