Government borrowing . Govt’s borrowing plan to mount pressure on G-Sec yields in H1

Government Security yields will continue to remain under pressure in the coming months due to the expected large supply of G-Secs amid a resurgence in inflation and continued sell-off in global bonds.

The Government is planning to raise ₹7.24-lakh crore in the first half of 2021-22, which is 60 per cent of the targeted borrowing for the full fiscal year.

The yield on the benchmark 10-year G-Sec, carrying 5.85 per cent coupon rate, hardened about 31 basis points in the fourth quarter (Q4) of FY2021, with its price declining by ₹2.24. It closed the fiscal year at 6.1768 per cent compared to 5.8653 per cent as at December-end.

Global sell-off

Kavita Chacko, Senior Economist, CARE Ratings, observed in a report that domestic bond yields would continue to be pressured given that sizeable issuances of G-Secs are planned for the coming months amid a resurgence in inflation and the continued sell-off in global bonds.

At the same time, the Reserve Bank of India is likely to announce measures to anchor bond yields at its upcoming Monetary Policy meet, she said.

Chacko expects the 10-year G-Sec yield to rule in the 6.15-6.22 per cent range in April with the language of the Monetary Policy on close watch.

Aditi Nayar, Principal Economist, ICRA, said given the large supply of dated G-secs and state development loans (SDL) expected in the coming months as well as the likelihood of firming of global interest rates, G-Sec yields are likely to rise in the absence of sizeable and frequent open market operations.

Nayar expects the benchmark yield to harden to 6.35 per cent by the end of the first quarter.

Unwinding accommodation

Rahul Bajoria, Chief India Economist, Barclays Securities (India), and Shreya Sodhani, Research Analyst, Barclays Investment Bank, Singapore, noted that a premature tightening of financial conditions is being priced-in by markets. “We see this as a signal that markets believe the RBI will over-correct from its previous policy choices. Clearly, the ghosts of a late withdrawal of post-GFC (Global Financial Crisis) stimulus are still fresh and the central bank may not want to be seen as being too far behind the curve,” they said in a report.

The Barclays report emphasised that RBI has already taken baby steps to unwind some monetary accommodation.

So far, it has undertaken variable rate reverse repo auctions, announced a 100 basis points phased increase in the cash reserve ratio to reverse last year’s cut, and expressed its discomfort at rising risks to the inflation outlook. “Markets, in turn, have reacted aggressively and India’s yield curve has steepened by at least 50- 75 basis points across the spectrum,” the report said.

COMMENT NOW