Bond yields spike on extra govt mop-up

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Published: May 12, 2020 4:10 AM

Bonds sold off on Monday with the benchmark yield spiking a sharp 20 basis points to 6.17% after the government on Friday said it would tap the markets for an additional Rs 4.2 lakh crore this fiscal.

Dealers are nervous in the absence of any measures by the Reserve Bank of India (RBI) to help mop up the supply and are bracing for a further rise in yields.Dealers are nervous in the absence of any measures by the Reserve Bank of India (RBI) to help mop up the supply and are bracing for a further rise in yields.

Bonds sold off on Monday with the benchmark yield spiking a sharp 20 basis points to 6.17% after the government on Friday said it would tap the markets for an additional Rs 4.2 lakh crore this fiscal. Dealers are nervous in the absence of any measures by the Reserve Bank of India (RBI) to help mop up the supply and are bracing for a further rise in yields.

With the Centre’s net borrowing now around Rs 9.5 lakh crore, the total supply of paper could hit Rs 16 lakh crore, assuming states pick up about Rs 6.4 lakh crore. Economists estimate the combined fiscal deficit — of the Centre and states — for FY21 to hit double digits.

The additional borrowings, experts say, could be funded via a mix of open-market operations (OMO) purchases, direct monetisation and investments by banks incentivised by an HTM sweetner.

Ananth Narayan, professor-finance at SPJIMR told FE, RBI already has commenced monetising a chunk of the slippage and added he expects substantial purchases through OMOs. If they don’t, yields will go to very high levels. We expect a major slippage in India’s true combined deficit for FY21 to over 14 % of GDP,” Narayan said.

Indranil Sengupta, economist, Bank of America, wrote the RBI could directly subscribe to the Centre’s primary auctions with June quarter GDP set to contract by 9.3%. “Section 4(2) of the FRBM Act allows the RBI to subscribe to primary auctions if growth falls by 3% from the previous four quarter average,” Sengupta said.

Monday’s spike in the benchmark yield to 6.17% was the biggest single-day since February 2017, Bloomberg data shows. The new 10-year paper maturing in 2030 also closed 10 bps higher at 5.82%.

Siddharth Shah, head of treasury, STCI Primary Dealer, noted that while the markets had anticipated the additional borrowings, they had expected the stimulus package to be announced first. Moreover, they were also awaiting some announcements from RBI.”‘Any announcement by the central bank in terms of OMO purchases, or any other operations to support the government’s additional borrowing will determine the reversal of upward movement in yields,” Shah said.

RBI has been supporting the bond markets through secondary market purchases of securities and through outright OMO purchases. RBI data show that it has bought over Rs 91,000 crore of securities, a bulk of which is thought to be treasury bills, through the secondary market in April. Experts say apart from the T-Bills, the central bank purchases may now also extend to dated securities.

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