Soon after the government on Wednesday announced its decision to cut additional borrowing requirement to Rs 20,000 crore, 10-year bond yield plunged 17 basis points (bps) to 7.21 percent compared to its previous day close of 7.38 percent. The much-needed relief required by the bond market comes a day after bond yields spiked 11 basis points to close at 7.38 percent, from its previous close of 7.27 percent on Monday, after Reserve Bank of India (RBI) Deputy Governor Viral Acharya pulled up the banks saying that risk management “leaves a lot to be desired” and asked them to modernise their treasury functions and adopt robust risk controls. “The efficiency with which this risk is currently managed leaves a lot to be desired. While duration risk management is constrained by the G-Secs issuer’s choice of maturity structure and liquidity in the secondary bond market, the risk can be managed more nimbly by also availing of hedging markets,” Viral Acharya said. Just when the bond markets were beginning to look jittery, the government slashed its additional borrowing target to calm the bond markets.
Subhash Chandra Garg, secretary, department of economic affairs, Ministry of Finance, today said in a tweet, “Government has reassessed additional borrowing requirements taking note of revenue receipts and expenditure pattern. Requirement of additional borrowing being reduced from Rs 50,000 crore as notified earlier to Rs 20,000 crore.” On 27 December, the government had announced that it will borrow an additional Rs 50,000 crore through bonds to fund its fiscal deficit.
Surge in banking stocks
Driven by the news of government borrowing requirement being cut, banking stocks surged during the morning trade, with indices gaining around half a percent. “The move is a big positive surprise. We were mindful of the indirect tax collection falling short of expectations. In that context, this is a big surprise. It also means that a shortfall in indirect taxes is being made up (for). All in all, this is a positive surprise, which is getting reflected in the market,” Manishi Raychaudhuri, Asian Equity Strategist, Equity Cash Asia Pacific, BNP Paribas told CNBC TV18.
Earlier in December, the government had said that it will borrow an additional Rs 50,000 crore through dated securities this fiscal while trimming receipts via treasury bills by Rs 61,203 crore between now and March 2018, stoking concerns about a flare-up of bond yields. This had sent the bond yields soaring 17.70 basis points (bps) to 7.396% on December 28th— a level last seen on 4 July 2016, and further to 7.4% in January-18. “We thought that the government’s decision to borrow another Rs 500 billion/0.3 percent of GDP was an avoidable negative surprise in an already nervous G-sec market,” said a Bank of America Merrill Lynch research note.