The rise in bond yields is worrying the central government as its cost of borrowing has shot up by 20 basis points across tenures over the last three months.
The concern of the government was evident from the Reserve Bank of India’s move to reject all bids it received for three bonds at last week’s auction. Of the targeted Rs 15,000 crore, the government could raise only Rs 6,000 crore.
“It’s likely the government was unwilling to borrow at a very high level, so the bids were rejected rather than the auction being devolved,” said B Prasanna, managing director of ICICI Securities Primary Dealership. The government has borrowed Rs 1.80 lakh crore during April-June by reissuing bonds across tenures and the cutoff yield set at auctions has been edging up at every successive sale. This is true across the curve.
For instance, in April the government borrowed Rs 3,000 crore through 8-year bonds by paying 7.68% yield. This yield rose to 8.00% at the auction on June 5 and further to 8.10% on June 12. Similarly, the cost of borrowing through 10-year bonds increased 10 bps this month for the government. The cutoff yield on the benchmark 10-year bond was 7.77% at the latest auction on June 19.
“The bond market started on a softer note in April and yields have gone up since then, first due to the global sell-off and then in June because of the policy statement. I see yields going down but not immediately,” said Ashish Vaidya, ED and head of treasury, DBS Bank.
The rise in the cost of borrowing for the largest risk-free borrower of the bond market is undermining the Reserve Bank of India’s monetary policy tranmission to interest rates in the economy.
In a softening interest rate environment, government bond yields are the first to fall. The RBI has been in an accomodative policy stance since January and indeed, government bond yields eased 20 bps between January and April. The RBI slashed its repo rate by 25 bps in its bi-monthly policy review on June 2 but said it has front-loaded rate cuts, indicating more rate cuts would be hard to come.
Bond yields have surged 20 bps since then on the worry that the RBI would cut rates no more. Added to this bearish view was the global bond market sell-off with the Greece crisis heightening this week.
Foreign investors have sold $464 million worth of bonds since April, part of the a bond sell-off globally. Given that most investors are wary of bond investments.