RBI accepts higher Treasury bill yields as oil prices surge, liquidity tightens, and India's inflation risks mount.
The Indian government faced higher borrowing costs at the October 28 Treasury bill auction, with yields on three-month and one-year bills rising by roughly 20 basis points from their October 14 levels. The Reserve Bank of India (RBI) accepted bids at a cut-off yield of 5.9337% on 91-day Treasury bills and 6.6900% on 364-day bills. A week earlier, the central bank had turned down every bid at the previous sale.
The higher yields suggest that the RBI's attempt to hold down short-term rates by refusing costly bids has become increasingly difficult to sustain amid mounting market pressure. Those pressures are a crude oil shock tied to war in West Asia, a rupee near 95 to the dollar, retail inflation that reached 5.54% in September and a banking system whose cash surplus has shrunk in a matter of weeks. Traders now expect further tightening, saying near-deficit liquidity and high oil prices had sealed another 50 to 75 basis points of rate increases, though the RBI itself has committed only to a hike or a pause.
The October 28 sale covered the same amounts the RBI had offered and rejected seven days earlier: ₹8,000 crore each of 91-day and 182-day bills and ₹7,000 crore of 364-day bills. All three were fully sold, with the 182-day bill clearing at 6.5493%. Bids exceeded the amounts on offer. Competitive bids totaled ₹15,676.74 crore for the 91-day bill, ₹21,225.17 crore for the 182-day bill and ₹15,310 crore for the 364-day bill.
The bids were accepted at yields the central bank had been unwilling to accept a week earlier. At the October 14 auction, cut-off yields stood at 5.7281% for 91-day bills, 6.2896% for 182-day bills and 6.4891% for 364-day bills. Measured against those levels, the 91-day and 364-day yields rose about 20 basis points each, while the 182-day yield climbed about 26 basis points. Treasury bill yields reached their highest levels in nearly two years, according to traders.
The October 21 rejection makes the latest auction results particularly significant. The RBI's results sheet for that day shows no cut-off yield and nil accepted across all three maturities. It had received 67 competitive bids for the 91-day bill, 63 for the 182-day bill and 75 for the 364-day bill. The yields sought then were about 15 basis points above the previous week's levels, according to traders.
What mattered to dealers was the message behind that decision. The central bank was showing discomfort with the sharp rise in short-term borrowing costs, they said. The RBI was reluctant to pay high rates because that could have signaled elevated short-term rates, bond market players said, and a government cash balance of about ₹5.3 lakh crore meant it had no immediate need for the funds.
By accepting higher yields a week later, the RBI effectively conceded that the market had not backed down. A trader at a primary dealership described the mechanism behind it. "Liquidity tightening and high oil prices have intensified short-term funding pressures, prompting traders to demand a higher liquidity premium and triggering higher yields in the t-bill," the trader said.
Banking-system liquidity is the first mechanism pushing short-term yields higher, and it has shifted quickly. RBI data show the central bank absorbed a net ₹30,419.13 crore from the banking system through its operations as of October 27, meaning the system was still in surplus but only narrowly. That figure includes ₹1,50,007 crore of four-day variable rate repo funds the RBI had injected on October 26.
The daily average surplus in October through the latest data stood at ₹2.6 lakh crore, compared with ₹7.8 lakh crore in September. As recently as October 12, the RBI absorbed a net ₹3.36 trillion. Bond market players tied the tight fund flow to a high government balance, Goods and Services Tax outflows and money blocked in the Jio Platforms initial public offering, one account reported.
Overnight rates show the strain. The weighted average rate in the overnight money market was 5.64% on October 27, above the 5.50% repo rate, and banks borrowed ₹7,022 crore that day through the marginal standing facility at 5.75%. "Liquidity has almost dried up, keeping overnight rates elevated," a dealer at a state-owned bank said on October 21.
Beyond domestic liquidity, the surge in crude prices has created a separate source of pressure, weighing on the rupee and on the inflation outlook. Brent crude rose more than 1% to $115.3 a barrel during Indian trading hours on October 28 after an attack on a refinery in Saudi Arabia, a level recorded intraday rather than at a settlement. Bearish sentiment toward the rupee intensified given uncertainty over oil prices and their impact on India's economy, the same report said.
The rupee's slide continued on October 28. It closed at 95.2200 per U.S. dollar, against 95.1150 a session earlier, while the central bank likely intervened to contain the decline. "The direction of travel yet again seems to have turned decisively higher on the dollar-rupee," a trader at a state-run bank said.
Consumer prices, where an oil shock ultimately reaches the RBI's inflation mandate, were already rising. Retail inflation rose to 5.54% in September from 4.83% in August, the Ministry of Statistics and Programme Implementation said in figures released on October 12. Food inflation reached 7.74%, and rural inflation, at 6.08%, outpaced the urban rate of 4.88%.
Those numbers had already pushed the RBI into a tightening cycle before the latest bill auction. On October 7, its Monetary Policy Committee (MPC) voted unanimously to raise the repo rate by 25 basis points to 5.50% and changed its stance to "calibrated tightening." The committee pointed to "the re-escalation of the conflict in West Asia and the consequent sharp volatility in crude oil prices" as the main change since its August meeting.
The policy statement also set out how far the RBI was prepared to go. The new stance, it said, "only signals that given the current conditions, rate cuts are off the table in the near term and policy action ahead can only be a rate hike or a pause." The committee projected inflation at 5.2% for the 2026-27 fiscal year, with the October-December quarter at 6.0%, and two members, Nagesh Kumar and Ram Singh, preferred to keep the stance neutral.
Actual inflation has already run ahead of the committee's forecasts, with the September reading of 5.54% above the 4.9% projected for the July-September quarter as a whole. Bill yields have similarly moved well clear of the policy rate. The 364-day bill's cut-off of 6.69% sits about 119 basis points above the repo rate. The spread between the one-year bill and the repo rate had already widened to 99 basis points at the October 14 auction, its highest in four years.
Higher yields are not confined to short-maturity instruments. The benchmark 10-year government bond yield closed at 7.44% on October 28, little changed on the day. That level matched the October 21 close, which was the highest since November 4, 2022. Elevated crude prices have added to concerns about inflation, a wider fiscal deficit and slower growth, traders said.
Pressure in domestic markets has also coincided with heavy foreign portfolio outflows, although equity and debt flows send different signals. Foreign portfolio investors (FPIs) were net sellers of ₹36,164 crore of Indian equities in October through October 28, depository data show. Their debt flows were mixed over the same period, with ₹5,849 crore of net buying under the general limit offset by ₹6,712 crore of net selling in bonds under the Fully Accessible Route. Total net FPI outflows for the month to date came to ₹27,651 crore, after ₹58,443 crore in September.
The latest Federal Reserve decision offered little immediate relief from global rate pressures. The U.S. central bank kept its benchmark range at 3.75% to 4% on October 28, in a statement released at 2 p.m. EDT (UTC-04). Two policymakers, Lisa Cook and Beth Hammack, dissented in favor of a quarter-point increase. "Inflation remains elevated," the Federal Open Market Committee said.
That pressure predates this week, since the Fed's September increase had already shaped the RBI's assessment on October 7. The MPC noted that the Fed hike and tightening by other major central banks had reinforced expectations of higher global policy rates. The October 28 decision left the U.S. range where it has stood since that quarter-point increase.
While global rates constrain the external backdrop, the RBI's domestic decision also turns on the balance between inflation risks and growth, and growth has held up. The committee projected real gross domestic product growth of 7.1% for 2026-27 after a 7.8% expansion in the April-June quarter, and said the economy was expected to remain resilient.
Traders' expectations now center on the December meeting. Bets on a 50-basis-point increase in December were growing as of October 21. The MPC's next meeting is scheduled for December 2 to 4, and October inflation data are due on November 12.
The committee has tied the extent of its tightening to evidence rather than a set path. The duration and extent of the rate hike cycle, it said, "would be contingent on the actual growth-inflation developments and outlook, especially that of underlying inflation, the extent of broadening of price pressures and second round effects of the supply shock." The policy statement also noted that there were "only limited signs of supply side pressures getting embedded in pricing behaviour."
That caveat frames the choice ahead of December. Bill yields, a thinning cash surplus and a weaker rupee all point to markets positioning for an oil shock that lasts. The open question is whether crude stays near $115 long enough to push price pressures into core inflation and pricing behavior, or whether a resolution of the West Asia conflict eases them first. The answer will help determine whether the RBI delivers the additional 50 to 75 basis points of rate increases that traders expect.
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