The Hindu Business Line : States facing elections turn to short-term T-bills

Weighted yields slip
Preference for short term T-bills was due to their higher returns and liquidity they offered.
States’ investments have seen non-competitive bids soar in the last few weeks.
More non-competitive bidders have caused weighted yields to fall below cut-off yields.

C. Shivkumar

Bangalore, Dec 26 States with short-term surpluses and facing elections are beginning to park their resources in Treasury Bills.

Banking sources said that the States that parked funds in short-term treasury bills included Gujarat, Karnataka and Himachal Pradesh. The preference for 91-day T-bills was in view of their high liquidity. The 91-day T-bills are among the most liquid instruments in the financial markets.

Large revenue surpluses

Banking sources said the investment in T-bills was also driven by improved tax receipts and Election Commission’s code of conduct, preventing the State Government to take on any extraordinary capital or revenue expenditure during the run up to the elections.

Besides, States like Karnataka are faced with large revenue surpluses in excess of Rs 1,500 crore in view of buoyant tax receipts after migrating to the value-added tax regime. Karnataka, as a result, has not accessed the State Development Loan market this year at all, being the only State to do so.

States are entirely non-competitive investors in T-bills. States’ investments have seen non-competitive bids soar during the last few weeks. At last week’s T-bill auctions, there were 4 non-competitive bidders, for Rs 7,300 crore.

This trend began in October when there were only two non-competitive bids for Rs 4,000 crore for the 91-day T-bills.

Higher returns

Traditionally, State Government departments have parked funds only in public sector banks, at very low rates of interest, either in current accounts or in the form of short-term time deposits. Current account deposits are not eligible for any interest. Short-term time deposits, for about six months, generated returns of barely 6 per cent. The preference for short-term T-bills was in view of the higher returns along with the liquidity attached to these bills. States also had the option of investing in 182-day T-bills though most preferred the 91-day bills.

As a result of the States’ investment in the 91-day bills, the weighted yields have sharply dropped. The weighted yield at the weekly T-bill auction on November 24 was 7.48 per cent. The difference between the weighted and cut-off yield was about 5 basis points. The cut-off yield is the lowest price accepted by the RBI at the T-bill auctions. The weighted yields included both competitive and non-competitive bids. At last week’s auction, the weighted yields had dropped 13 basis points to 7.35 per cent. In view of the large non-competitive bidders’ participation, the weighted yields have remained lower than the cut-off yields.

But bankers said that the trend was unlikely to last long, especially since a new Government has been sworn-in in Gujarat. The funds draw down was likely to start once the government finalises its expenditure for the financial year.

Accordingly, the number of non-competitive bids at the auctions was likely to drop in the coming weeks.

More Stories on : Short Term Instruments | Politics

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Bonds gain from RBI’s focus on stability

Rupee ends marginally higher

SKS Microfinance makes strides in north-coast dists

States facing elections turn to short-term T-bills

Call rates close lower