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India's treasury bill cut-off yields eased 6 to 10 basis points on Wednesday as compared to the previous week, as improving banking system liquidity surplus and expectations of a less aggressive hike by the Reserve Bank of India aided sentiment.

The RBI sold 91-day T-Bill at cutoff yield of 5.56%, down six basis points (bps) as compared to last week, while selling 182-day and 364-day notes at 5.89% and 6.23% cutoff yield respectively, which is lower by 9 and 10 bps respectively.

"Liquidity situation has improved and that generally reflects immediately in the ultra-short end of the yield curve, which was evident in T-Bill auction," said Debendra Kumar Dash, senior vice president - Treasury at AU Small Finance Bank.

Also Read: RBI MPC meet starts today: Repo rate hike on the cards after Fed’s aggressive push

India's banking system liquidity surplus has moved above two trillion rupees, a four-fold rise as compared to last week's T-Bill auction which saw yields jumping to their highest levels in at least three years.

The fall in yields comes as the market braces for the third consecutive hike in interest rate from the RBI's monetary policy committee.

The decision is due on Friday with views on the quantum of rate increase split between 25 basis points and 50 basis points, according to a Reuters poll of economists. The RBI has already raised repo rate by 90 bps since May to 4.90%.

"The worry that central bank may hike aggressively has eased and I feel they (RBI) may go ahead only with a 25-basis-point hike, and T-Bill yields may further fall in coming auctions," Dash added.

Market participants have said the weekly auction quantum of T-Bills for the current quarter could be easily absorbed by investors and cutoff levels seen last week may be a peak for the near-term. 

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