India's ultra-short-term borrowing costs spike; premium over policy rate hits 4-year high

The Indian government’s ultra-short-term borrowing costs jumped at a treasury bill auction on Wednesday, with the premium over the benchmark policy rate rising to a four-year high as investors priced in more aggressive monetary policy tightening.

The Reserve Bank of India hiked rates for the first time in nearly four years last week and shifted its stance, signalling more increases, while Governor Sanjay Malhotra on Tuesday said monetary policy cannot be seen as separate from financial stability, prompting traders to ramp up rate hike bets.

New Delhi on Wednesday sold 182-day and 364-day treasury bills at cutoff yields of 6.29% and 6.49%, respectively, their highest levels in about 18 months. Yields for both maturities rose more than 20 basis points compared to a week ago.

The premium, or spread over the 5.5% repo rate, jumped to 79 bps and 99 bps for the six-month and one-year notes, levels last seen in November 2022.

”A clearly hawkish policy guidance and latest commentary has raised terminal rate expectations on the back of resilient growth and higher inflation,” said VRC Reddy, treasury head at Karur Vysya Bank.

India’s bond yield curve is flattening, with the one-year rate up 31 bps in the last two weeks, while the five- and 10-year yields have risen 26 and 20 bps over the same period.

”I see another 50 bps of rate hikes this fiscal and if risks from higher oil prices materialise, it may lead to persistently higher inflation beyond the RBI’s comfort zone and compel the RBI to hike rates even in FY28,” Mandar Pitale, head of treasury at SBM Bank (India), said.

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Bond yields across the three tenors could converge at the peak of the tightening cycle, he added.