Bond yields to cross 7 percent on higher govt borrowing

02 Apr , 2022 By : Kanchan Joshi

Mumbai: Bond yields on 10 year government securities are likely to cross 7 percent after the government decided to frontload the government borrowing program in the first half of the fiscal year, putting the Reserve Bank of India in a tight spot as the room for bond purchases would be limited this year amidst the expectation of gradual policy normalisation.

On Thursday the government announced that it would borrow Rs8.45 lakh crore in the first half of the fiscal year, higher than that of last year which was Rs7.24 lakh crore.

According to analysts at Kotak Economic Research, the supply pressure is expected to be the highest in April, May and July compared to the corresponding months in 1HFY22. The government has also increased the short-term borrowing through Treasury bills to Rs4.32 lakh crore in the first quarter .

The bond market is therefore likely to be under pressure amid high domestic bond supply and other global headwinds from higher commodity prices and US treasury yields.

“The frontloading and compounding impact of most of these factors should push the 10-year benchmark yield towards a peak of 7.40-7.50% in 1HFY23 in the absence of RBI intervention," said Kotak. “We estimate RBI will need to support the bond market by nearly Rs4-5 tn through outright or special OMO purchases to manage the heavy dated supply," it added.

That said economists are not expecting RBI to actively intervene in the bond market like it did in previous years. With rising inflationary pressure, RBI will have to start policy normalisation as early as August.

Separately, economists are expecting RBI to announce measures that would enable banks to absorb the government borrowing program.

“RBI could look at increasing the Held to Maturity ratio of banks in the April policy to ensure that the borrowing programme goes through smoothly," said Vivek Kumar, economist, QuantEco.

For now the market will watch out for the central bank’s rate decision on April 8 to gauge how long the RBI can continue its accommodative stance and how the RBI can support the bond market.