MUMBAI, Feb 27 (Reuters) - The Reserve Bank of India rejected some bids in a treasury bill auction on Wednesday because investors had demanded yields it considered to be too high, said sources with direct knowledge of the matter.
The unusual rejections from the RBI, which manages debt sales and purchases on behalf of the government, led the central bank to accept only 99.03 billion rupees ($1.83 billion) out of 120 billion rupees on offer, despite strong investor interest as shown by the bid-to-cover ratio.
For full auction results, see:
The rejections surprised investors who had grown used to fully subscribed auctions of shorter papers over the past year.
Sources told Reuters the RBI had taken the step because the government has a comfortable cash balance - estimated at over 1 trillion rupees by market participants - giving it some flexibility to borrow less from markets.
The rejected bids from the central bank come after the finance ministry, which has been slashing spending to shore up its finances, cancelled an auction of longer-dated bonds that was scheduled for last week.
"The government has huge surplus cash balance and some bids came at higher level, said one official with direct knowledge of the development, referring to the yield.
"It doesn't make sense to pay higher rate when cash position is comfortable," said the official.
Another official confirmed the RBI's rejections, and said the central bank could reject future bids if it believes the yields are too high.
Traders said the yields they had demanded on Wednesday had been high due to cash tightness and less demand for assets with shorter maturities ahead of the end of the fiscal year in March.
The government has been on an austerity drive as it seeks to meet its fiscal deficit target of 5.3 percent of gross domestic product for the year ending in March, hence resulting in the build-up of cash reserves.
Finance Minister P. Chidambaram is due to present the 2013/14 budget on Thursday, in what markets are seeing as a critical test of the government's fiscal discipline.
Bond investors widely expect the government to keep net borrowing under 5 trillion rupees for the year starting in April, in line with levels for the current fiscal year. ($1 = 54.1550 rupees) (Reporting by Suvashree DeyChoudhury, Neha Dasgupta, and Shamik Paul; Writing by Subhadip Sircar; Editing by Rafael Nam and Anand Basu)