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Government security (G-Sec) yields hardened for the second straight trading session this week as the government, on Monday, announced additional borrowing of ₹80,000 crore in the February-March 2021 period.
Bond market players fear that the higher fiscal deficit numbers announced in the Budget for the current financial year (revised estimate of 9.5 per cent of GDP against Budget estimate/BE of 3.5 per cent) and the next (6.8 per cent BE) could push up the cost of financing in the economy.
In Tuesday’s trading, yield on the benchmark 10-year G-Sec (carrying a coupon of 5.77 per cent) went up about 7 basis points (bps) to close at 6.1495 per cent over Monday’s close, with its price declining 48 paise to ₹97.30.
Bond yields and price move in opposite directions..One basis point is equal to one-hundredth of a percentage point.
On Monday, when the Budget was was announced, yield on the aforementioned benchmark G-Sec jumped about 13 bps, with its price declining about 91 paise.
Referring to the ₹12-lakh crore government borrowing in FY21, Marzban Irani, CIO-Fixed Income, LIC Mutual Fund, observed that: “During this period, the Reserve Bank of India (RBI) injected liquidity and cut the policy rate.
“Now as we step into FY22, the leeway to cut (the policy rate) is limited. Liquidity is getting sucked out gradually and the borrowing amount is still ₹12-lakh crore. Hence the yields are hardening.”
Irani expects the RBI to gradually suck out liquidity in a non disruptive manner and maintain stance status quo in the forthcoming monetary policy review.
He is of the view that the bond market needs some support from the RBI by way of open market operation (purchase) of G-Secs.
Abheek Barua, Chief Economist, HDFC Bank, in his report ‘Budget 2021-22: The Queen’s Gambit’ noted that the unexpectedly large fiscal deficit numbers both for the current and the next year entail huge borrowings, much beyond market expectations.
“Government bond yields have hardened quite a bit in the wake of the recovery. The Finance Ministry and the RBI will have to work closely together to check the rise in yields and ensure that the Budget doesn’t ultimately result in a rise in borrowing costs across the board,” he said.
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