Rise in G-Sec yields perplexing: SBI report

The rise in government security (G-Sec) yields defies logic despite the government announcing buyback of securities and the central bank cancelling open market sale of debt, according to a report by State Bank of India’s economic research department.

The report assessed that the increase in yields would cost the exchequer around ₹3,200 crore on an annualised basis.

The bank’s report attributed the contrarian movement in yields to possibly the significant offloading of G-Sec by select players. Interestingly, after rating upgrade (by Moody’s) some of the market players bought securities and now they are offloading them in the market, driving up yields.

Rate hike fears

“Second, there are also unwarranted talks about impending rate hikes by the RBI with inflation set to cross 4 per cent in November adding to bond market fears.

“However, we believe such talks defy common sense, logic and are analytically self-defeating as we expect FY18 inflation average to be at 3.6 per cent and FY19 inflation average at 4.4 per cent, well within inflation targeting limits,” said Soumya Kanti Ghosh, Group Chief Economic Adviser, SBI.

Inflation, according to the report, is likely to stay in the 4.5-5 per cent range between January and June 2018, before declining to 4-4.5 per cent between July and December 18.

The report observed that the government is pushing towards a fiscal deficit of 3.2 per cent in current fiscal even as revenue pressures continue to mount.

However, the announcement by the government of buyback of ₹30,000 crore of bonds on November 27 is an indication that the government means business in maintaining market borrowing programme at ₹3.5 lakh crore for FY18, it added.

Simultaneously, the RBI recently announced cancellation of sale of debt through open market operation (OMO).

“Both these measures (buyback and cancellation of OMO sale) are commendable and should have pushed down the yields post the rating upgrade. However, instead G-sec yields have crossed 7 per cent,” the report said.

The weighted average yield on the benchmark 10-year G-Sec maturing in 2017 declined about seven basis points on November 17 when Moody’s upgraded the local and foreign currency issuer ratings for India to ‘Baa2’ from ‘Baa3’, with a stable outlook, from positive.

After touching a low of 6.90 per cent on November 21, the yields started moving up again to cross 7 per cent.

Finally, referring to the results of 2,795 listed corporates in Q2 (July-September) FY18, the report expects GVA (gross value added) growth for Q2 FY18 at 6.1-6.2 per cent and GDP at 6.3-6.4 per cent.

This should also have a sobering impact on bond yields going forward, it added.

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