Interest Rates on Treasury Bills Reaches Record High of 14%; What Impact Does It Have on Stock Market?

The interest rate on *Treasury Bills (T-Bills) has increased as a result of Nepal Rastra Bank's (NRB) monetary policy to raise the bank rate.

A tender for the renewal of Treasury Bills of Rs 15.6 Arba was published by Nepal Rastra Bank and the T-Bills are being offered for sale by banks at an interest rate of 13.99%.

Through negotiations, NRB attempted to sell 200 crores under 28-day Treasury Bills and 1360 Crores under 91-day Treasury Bills. Treasury bills were purchased by banks at interest rates as high as 13.99%, settling at a record high. Also, this bond is not a new bond but a renewal of an old bond. The high rates signal an acute shortage of liquidity in the banking system. 

In the current fiscal year, the government plans to increase the domestic debt by 2.56 Kharba. Treasury bills, development bonds, citizen savings bonds, and overseas employment savings bonds are some of the ways the government borrows money for periods shorter than a year.

*Treasury bills or T-bills, which are money market instruments, are short-term debt instruments issued by the Nepal Rastra Bank and are presently issued in four tenors, namely, 28 days, 91 days, 182 days, and 364 days.

Also, Nepal Treasury Bills: Yield: 91 Days data was reported at 12.0033 % p.a in July 26, 2022. This records an increase from the previous number of 9.3332 % p.a for July 19, 2022. Whereas, the Treasury Bills: Yield: 28 day data was reported at 11.3418% for July, 26 2022. 

Source: Nepal Rastra Bank

When inflationary pressures emerge, Treasury yields move higher as fixed income products become less desirable. Additionally, inflationary pressures typically force central banks to raise interest rates to shrink the money supply. In inflationary environments, investors are forced to reach for greater yield to compensate for diminished purchasing power in the future. In general, economic inflation also causes interest rates on Treasury notes to climb, and deflation causes interest rates to fall.

Impact of High T-Bill Rates on Stock Market

The bi-directional causality between the interest rate and the stock index has an important implication that not only the interest rate policy of NRB considerably influences in the stock market performances in long run but also the stock market performances cause the investors in their decision to choose between the stock market and bank deposits.

Also, low cost of capital is crucially linked to creating the demand for and supply of securities through business investment opportunities. Higher interest rates, on the other hands, not only discourage businesses to use credit but also motivate investors to switch to bank deposits (low risk) causing a decline in stock prices.