FY21: Momentous year for bonds, rupee and forex reserves amid the pandemic

Supply outpaced demand for fixed-income paper with Centre's Rs 12 trn borrowing plan and Rs 10 trn by states. But RBI support ensured it didn't pinch hard till the end of the year

In a relief of sorts for the bond market, the yields on the 10-year bond are closing lower than how the started the year, but it could have been a lot worse.

The 10-year bond yields closed at 6.147 per cent on Tuesday, on the eve of the closure of the financial year 2020-21. The yields started the financial year at 6.305 per cent as the nation grappled with a lockdown.

The yields could have inched up higher following the US yields, and rising oil prices, but deft handling by the RBI ensured yields remained soft.

If the yields close the financial year substantially higher than what they were, the bank treasuries bleed on account of mark-to-market losses. That kind of loss could be avoided for this financial year.

Battered by the Coronavirus pandemic, the RBI offered huge accommodation in the form of liquidity support through secondary market bond purchases, targeted long term repo operations (TLTRO) etc. and to a great extent direct engagement between the markets and the the central bank brought down the yields to below 6 per cent level for the larger part of the financial year. The low yields helped the government to borrow cheaply at a 16-year low average yield.

In the course of the year, the central bank supported the market through Rs 3 trillion of secondary market bond purchases under its open market operations (OMO) programme.

The government’s Rs 12 trillion borrowing programme had spooked the market. The states, in addition, poured in another at least Rs 10 trillion. The supply far outpaced demand for fixed income papers in the financial year. But RBI support ensured it didn’t pinch hard till the end of the financial year when the US yields started rising and oil prices climbed up.

In the new financial year, “generally, bond yields would be under upward pressure due to the government borrowing programme, but the RBI is supportive,” noted Phillip Capital

Rupee, though, showed resilience in the year against a few odds.

The rupee closed on Tuesday at 73.39 a dollar, from its start of the year level of 76.28 a dollar.

In the year, The US dollar weakened against major currencies in the year, and the oil prices fell in the year before gaining momentum near the end of March.

Due to demand falling and imports coming down, India also became a current account surplus country after many years. The Reserve Bank utilized the opportunity to boost its reserves by over $100 billion, making it over $580 billion.

Had the RBI not accumulated its reserves, the rupee would have strengthened even more. Going forward though the rupee would depreciate as the economy picks up pace, experts say.

“After reaching nearly 77 a dollar level in April, the appreciation journey for the rupee was 11 months long and majorly driven on the theme of lower DXY and crude oil, recovering emerging markets increased money supply for restoration, and inflows pertaining to fundraising phenomenal,” said Amit Pabari, managing director of CR Forex Advisors.

“For the upcoming year, it seems to be more dollar and US yields centric. With Biden’s plans of $3 trillion on infra after giving $1.9 trillion direct stimuli, there could be higher growth, higher inflation, and higher yield leading to a stronger dollar,” Pabari said.

However, the losses in the pair, as compared to EM currencies, could be limited and would likely be capped near 75 levels as the country has sufficient FX reserves covering up-to 18 months imports, stable current account deficit, and stronger corporate and FII inflows, Pabari said. At the same time, gains also look limited to 72 levels given the higher fiscal deficit.