NEW DELHI The Reserve Bank of India sold treasury bills at their lowest yields in more than five years at a weekly auction on Wednesday after its pledge to infuse cash into the banking system sparked a rally in short-term rates.
The RBI set a cut-off of 6.85 percent for the 91-day t-bills, the lowest since November 2010, and 6.93 percent for the 182-day t-bills, the lowest since October 2010.
The sale comes a day after the central bank cut its key repo rate by 25 basis points, while also pledging to inject liquidity through purchases of bonds via open market operations or by buying dollars and selling rupees every month.
The liquidity injection measures are meant to pump enough cash into the banking system, allowing the sector to cut the lending rates and pass on the lower borrowing costs to the broader economy.
Analysts said short-term rates would likely rally as a result: the overnight cash rate dropped to as low as 6.05 percent on Wednesday, after touching a one-year high of 11.95 percent just last week.
Such a rally could spur the government to pay lower yields while leaving demand still healthy.
"In the next few auctions they could slide a bit more and by next month, they should trend 10-12 bps lower than current levels," said Vijay Sharma, senior executive vice-president at primary dealer PNB Gilts Ltd.
On Thursday, the RBI will buy up to 150 billion rupees ($2.25 billion) of bonds through OMOs, taking the total amount of purchases since December 2015 to 870 billion rupees, more than in the two previous years combined.
($1 = 66.6350 Indian rupees)
(Reporting by Neha Dasgupta, Editing by Subhranshu Sahu)
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