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The yield curve had started to flatten in March after the treasury bill auction saw higher cut-offs.
That’s because banks sought higher yields on medium-tenure paper (versus longer tenure) as they expected the Monetary Policy Committee of the Reserve Bank of India (RBI) to hike rates one more time during its review meeting on April 6, 2023.
The market had largely expected the RBI to hike the repo rate by 25 basis points (bps) — something that was factored into the yield curve. But the RBI instead opted for a pause.
This led to yields easing across the curve, with maximum swing in the shorter tenure — by ~10-13 bps — while the 10-year benchmark eased ~8 bps (volume weighted average).
All this has meant the spread between short- and long-term G-secs is the narrowest in eight years. Monthly average spreads between 10-year and 1-year benchmark G-secs tapered to ~19 bps in March, marking a ~92 per cent crunch on-year (see chart).
Spreads contracted in March after the RBI came up with a revised calendar for the auction of treasury bills, leading to an increase in demand from banks, which had turned chary of medium-term paper.
The government borrowed an additional ₹50,000 crore last month through treasury bills, which led to a spike in yields. The lack of supply of G-secs in March capped longer tenure rates.
What’s in store?
In the first half of fiscal 2024, the Central government has scheduled borrowings of ₹8.88-lakh crore from the market through dated securities, with a maximum— ~51.24 per cent — in the higher-than-10-year bucket (which is more than fiscal 2023).
But demand from insurance companies, which have been major buyers of longer-tenure debt, could be impacted because of the new taxation scheme that came into force on April 1, 2023 ( wherein proceeds of policies (savings plans) with an annual premium of over ₹5 lakh is taxable).
Thus, due to demand-supply dynamics, term premiums above 10-year tenures could rise.
Then there is the price of crude oil, which spiked after the production cut announced by OPEC+ to support ‘market stability’. Given India’s significant imports, elevated oil prices will have a bearing on India’s inflation trajectory.
While the Federal Reserve’s Open Market Committee had hinted at pausing the rate hike cycle during its previous policy review, the US inflation print — and the domestic one — along with the crude oil price trend will bear watching. But it is only a matter of time before yields move out of flatland.
The curve will likely steepen this year, with longer-end yields rising due to heavy supply and the shorter-end falling amid global repricing of rate-hike bets.
The authors are Director-Fixed Income Research and Manager, Fixed Income Research respectively, CRISIL Market Intelligence & Analytics
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