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Reserve Bank of India (RBI) rejected all bids at a sale of federal treasury bills for the first time in seven months amid a bond selloff that pushed borrowing costs to multi-year highs.

The government was scheduled to raise ₹23,000 crore ($2.4 billion) through the sale of the treasury bills, which are short-term notes maturing within a year. The RBI, which manages the government’s debt, said in a statement that no bids had been accepted, without providing any reasons.

This marks the first time since late March that an entire sale of treasury bills was cancelled.

“A probable reason for the rejection is that the bids would have been at higher yields,” said Rajeev Pawar, head of treasury, Ujjivan Small Finance Bank, referring to higher returns demanded by investors to buy the debt. The market is also talking about more interest-rate hikes by the RBI and that impacts shorter-maturity notes, he said.

Benchmark 10-year bond yields have climbed around 24 basis points this month, rising to their highest since March 2023 on Wednesday, as elevated oil prices worsen inflation risks for India and raise prospects for further monetary tightening by the RBI. The selloff has been more pronounced in shorter-tenor bonds, which are highly sensitive to rate expectations, with five-year yields jumping 30 basis points since end-September.

Given the scale of the selling pressure in longer-maturity notes, treasury bill yields could also rise further, said Puneet Pal, head of fixed income at PGIM India Mutual Fund.

The RBI’s recent efforts to contain inflation risks from excess banking cash have also weighed on sovereign debt. It has drained liquidity worth more than ₹1 lakh crore via bond sales and carried out large-scale forex swaps since last month to mop up a deluge of funds from a diaspora deposit programme.

The banking-system surplus liquidity was at 570 billion rupees as of October 20, far lower than ₹5 lakh crore at the beginning of the month.

More stories like this are available on bloomberg.com

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