While the RBI cut its policy repo rate by a notable 35 basis points and pleased the market, Indian bond yields have, intriguingly, inched up since then. The latest CPI inflation data for the month of July has been well within the RBI’s target of 4 per cent and rising growth concerns have only strengthened the case for further rate cuts by the RBI this year.
But from 6.3 per cent levels in the beginning of August, the yield on 10-year government bonds have increased to 6.6 per cent levels now.
Why has yield on the 10-year G-Sec moved up by 20-30 basis points over the past two weeks?
Possibility of a fiscal expansion by the Centre owing to expectations of a stimulus package to be announced by the Centre soon, has raised concerns over additional government borrowing. Also, with the much-hyped foreign sovereign bond issuance in a limbo, worries of over-supply of government bonds have taken centre-stage once again.
While the Centre retained its 3.3 per cent fiscal deficit target for the current fiscal in the Budget, doubts over its optimistic tax collection estimates have persisted in the market. India’s fiscal deficit crossed 61 per cent of its FY20 target in June itself. While higher disinvestment and dividend from the RBI can aid the Centre’s fisc., slowing economic growth has renewed fears of a slippage in fiscal deficit target.
The biggest overhang for Indian bond markets has been the huge gross market borrowings by the Centre pegged at high ₹7.1 lakh crore in the current fiscal (from Rs 5.71 lakh crore last year). But given that borrowing calendar is front-loaded, the market has been factoring in the easing of supply of bonds in the second half of the fiscal. For the April-September 2019 period, issuance of government securities amounts to Rs 4.42 lakh crore; the balance Rs 2.68 lakh crore of gross borrowings will come in the second half.
But the expectations of easing up of supply of bonds in the second half, are under question now. The growing clamour over the heightened slowdown in the economy, has raised hopes of a stimulus package being announced by the Centre. This could lead to additional borrowings, which implies more supply of bonds and higher yields (bond prices and yields and inversely related).
The hope of foreign sovereign bond issuance, easing up supply of bonds in the domestic market, is also under a cloud. The Rs 70,000-odd crore of foreign sovereign bond pegged in by most economists, could have made a substantial impact on lowering bond yields in the domestic market.
Global factors also need a watch. So far foreign portfolio investors (FPIs) have been pumping in money into the Indian bond market—net buyers to the tune of Rs 20,600 crore so far in 2019. A steady rupee and attractive yields have helped in drawing investors. But with rupee turning volatile of late, FPIs may turn wary—a fiscal expansion can only add to their woes.