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What's behind surging bond yields and how it's upsetting govt's fiscal math

For current financial year, govt plans to borrow Rs 2.88 trillion in the first half of 2018-19, out of Rs 6.05 trillion planned for entire year

Anup Roy  |  Mumbai 

Bond Yields
Illustration: Binay Sinha

The seems to have caught everyone by surprise once again. The 10-year bond yield closed at 7.54 per cent on Wednesday, rising steadily from its monetary policy day level of 7.13 per cent.

The following day, the (RBI) had said foreign portfolio investors could buy up to 1 percentage point more in bonds, but in two stages, in 2018-19.

The rise in the limit was less than what the market expected. While yields were firming up, the indicative calendar for state development loans came as a shock to the The calendar showed states would be borrowing Rs 1.15-1.28 trillion in the first quarter, way higher than the usual borrowing plan of Rs 700 billion. The SDL borrowing in the first week of the fiscal year was close to Rs 200 billion.

Oversupply of bonds clearly has dampened the appetite of struggling bond investors, dealers say. Rising crude could further disrupt the government’s fiscal deficit calculation. rose to $71 a barrel, a four-year high. Furthermore, is in talks with other major oil producing nations to keep at $80 a barrel for a long period. This will put pressure on a major oil importer like India. The country’s 70 per cent of the import is oil. If rise, the fiscal deficit would widen and the will have to bridge the gap through increased market borrowing.

bonds

For the current financial year, the plans to borrow Rs 2.88 trillion in the first half of 2018-19, out of Rs 6.05 trillion planned for the entire year. Now there are indications that may spike further as and the US both talk of missile attacks over and the US are already engaged in a trade-tariff war and has indicated it may go for currency devaluation.

“The market is very fragile. The demand-supply mechanism is not working and there is no long-term support indicated. Even as the RBI allowed spreading of mark-to-market losses over four quarters, and the first half borrowing came lower than expected, SDL borrowing calendar and low FPI limit increase have spoiled the mood,” said a senior bond dealer with a “There is no directional view about bonds. Some profit booking has happened, but it looks like even if the yield falls to 7.25-7.30 per cent level, some banks would book profit. This was not the case earlier, when talks were that the yield would hit 7 per cent,” said another private bank bond dealer.

The rapid rise in yields this week has virtually wiped off the entire gain that investors enjoyed after the announcement of first-half borrowing. In the December quarter, banks had recorded at least Rs 150 billion in MTM losses, but the March quarter was better. However, if the situation continues like this, it would be a difficult period for bond dealers.

“Most of the positive news around bonds were cosmetic, which sooner or later would have nullified anyway,” said Soumyajit Niyogi, associate director of India Ratings and Research.

First Published: Thu, April 12 2018. 06:56 IST
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