India's government borrowing costs for short-term instruments have seen a significant increase, with treasury bill (T-bill) yields hitting an 18-month high. This surge has pushed the premium of these yields over the Reserve Bank of India's (RBI) policy repo rate to a four-year peak, signaling market anticipation of further monetary tightening.
Rising Borrowing Costs Reflect Hawkish RBI Stance
At a recent auction, India sold 182-day and 364-day treasury bills at cutoff yields of 6.29% and 6.49% respectively. These figures represent the highest levels in approximately 18 months and mark an increase of over 20 basis points from the previous week. The premium over the standing 5.5% repo rate widened to 79 basis points for six-month bills and 99 basis points for one-year bills, levels not seen since November 2022.
The spike in India treasury bill yields follows the RBI's recent decision to raise interest rates for the first time in nearly four years. The central bank also adopted a more hawkish policy stance, suggesting that additional hikes could be on the horizon. Further solidifying these expectations, Governor Sanjay Malhotra emphasized that monetary policy cannot be viewed in isolation from financial stability, hinting at a continued focus on taming inflation.
“A clearly hawkish policy guidance and latest commentary has raised terminal rate expectations on the back of resilient growth and higher inflation,” noted VRC Reddy, treasury head at Karur Vysya Bank.
Market Anticipates Further Rate Hikes
The bond yield curve in India has also shown signs of flattening, with short-term yields rising more rapidly than longer-term rates. Over the past two weeks, the one-year government bond yield climbed by 31 basis points, outpacing the 26-basis-point rise in the five-year yield and the 20-basis-point increase in the 10-year yield.
Market participants largely expect the RBI to continue its rate-hiking cycle as inflationary pressures persist. Elevated crude oil prices pose a significant risk, given India's reliance on energy imports, potentially leading to higher fuel costs that could fuel broader inflation.
Mandar Pitale, head of treasury at SBM Bank (India), projected, “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.”
Pitale also suggested that bond yields across various maturities might converge at the peak of the monetary tightening cycle, indicating expectations that policy rates could remain elevated for an extended period. The sharp increase in treasury bill yields underscores how investors are adjusting their borrowing cost expectations in response to the RBI's firm signals and the ongoing challenge of inflation.