Money & Banking

G-Sec yields may soften temporarily if last two weekly auctions are cancelled: ICRA

Our Bureau Mumbai | Updated on March 06, 2021

Government Security (G-Sec) yields could soften temporarily as the Government of India’s (GoI) fiscal deficit may undershoot FY2021 Revised Estimate (RE) by ₹50,000 crore to ₹90,000 crore, possibly resulting in cancellation of the final two G-Sec auctions, according to credit rating agency ICRA.

ICRA observed that the yield for the 5.85 G-Sec 2030 has risen by more than 35 basis points (bps) since its introduction, to 6.23 per cent intra-day as on March 5, 2021, with an uptick in the recent weeks.

This increase in yields is mainly due to higher-than-expected fiscal deficit and borrowings of GoI for FY2021 and FY2022, a rise in US Treasury yields and hardening crude oil prices.


“In our assessment, there could be a modest upside to the GoI’s tax revenues, whereas its non-interest non-subsidy revenue expenditure may trail the Revised Estimate (RE) for FY2021. Therefore, the GoI’s fiscal deficit in FY2021 may end up undershooting the RE of ₹18.5 lakh crore by ₹50,000 crore to ₹90,000 crore,” said ICRA in a study.

Accordingly, the agency projected the fiscal deficit in FY2021 at ₹17.6-18.0 lakh crore or 9-9.2 per cent of GDP (as per ICRA’s nominal GDP forecasts), lower than the 9.5 per cent of GDP included in FY2021 RE.

“Based on this, we assess a lower borrowing requirement of the GoI in the remainder of this fiscal year. However, given the substantial devolvement in Friday’s auction, it remains unclear whether the GoI will choose to cancel the last two weekly auctions of Government of India security (G-sec) with a planned amount of ₹49,000 crore, instead of carrying forward larger cash balances,” ICRA’s economists Aditi Nayar, Yash Panjrath, Aarzoo Pahwa and Tiasha Chakraborty said.

If the final two G-Sec auctions for March 2021 are cancelled, ICRA expects the yield for the benchmark 5.85 GS 2030 may temporarily soften from the current levels (6.2324 per cent) to 6.10-6.15 per cent in the remainder of this month.

Subsequently, the bond yields would take cue from the domestic inflation trajectory, upcoming borrowing calendar of the GoI for H1 (first half) FY2022 and the State governments for Q1 (April-June) FY2022, magnitude of Open Market Operations (OMOs), as well as global factors such as movement in US treasury yields, crude oil prices, and overall risk sentiment.

Yields may remain elevated

Based on the available trends, the agency expects the headline CPI inflation to average around 6.1 per cent in FY2021, before easing to 4.5 per cent in FY2022, while remaining above the mid-point of the Monetary Policy Committee’s (MPC’s) current target range of 2 per cent to 6 per cent. ICRA anticipates that the MPC will leave the repo rate unchanged in 2021.

Given the large supply of dated G-sec and state development loans (SDL) that is expected in FY2022 (aggregate net supply projected at ₹16.0-16.5 lakh crore), yields may remain elevated in the absence of sizeable and frequent market operations.

In ICRA’s view, the benchmark yield may rise during Q1 FY2022, to as much as 6.35 per cent by the end of the quarter.

Published on March 06, 2021

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