Budget 2022: Bond yields shoot up as govt resorts to record borrowings

The RBI, which stopped buying bonds to prevent liquidity infusion, may have to support the borrowing again

Bond yields rose sharply in response to the higher than expected gross market borrowing numbers of the Union government.

The 10-year bond yield closed at 6.85 per cent, from its previous close of 6.68 per cent after the Union Budget pegged the budgeted gross market borrowing number for the next fiscal at Rs 14.95 trillion. 

The government will also be tapping small savings of Rs 5.67 trillion in the next fiscal, as against Rs 6.78 trillion in the current fiscal, to bridge its fiscal deficit of 6.4 per cent of the gross domestic product (GDP).

The net borrowing will be Rs 11.19 trillion in 2022-23, as against Rs 7.76 trillion in this fiscal.  

Bond dealers pointed out that the budget documents may not have accounted for the switch with the Reserve Bank of India done on the eve of the budget, which should lower the gross and net borrowing for the next fiscal by at least Rs 63,648 crore. 

Still, the numbers are much higher than the market expectations that ranged from Rs 10 trillion to Rs 13 trillion.

The high borrowing numbers make the rebalancing the RBI’s roles as monetary authority and the banker to the government challenging, as it slowly unwinds its accommodative policies. The bond yields have pushed up sharply already in response to RBI’s liquidity withdrawal.

Without RBI’s active support now, especially as no new avenue for foreign investors were announced in the budget, the yields could zoom. This would potentially negate the RBI’s effort in pushing growth by keeping borrowing costs low after the pandemic.

If the RBI buys bonds, however, it adds more liquidity in the system.

"These numbers are challenging. The bond markets will need an additional buyer for this kind of borrowing. The RBI may have to think of innovative ways to manage the yields and the borrowing programme,” said Jayesh Mehta, head of treasury at Bank of America. 

The gross borrowing number was “considerably above market expectations,” said  Harshad Patil, chief investments officer of Tata AIA Life Insurance, adding, the “fixed income market would seek further clarity regarding the financing mechanism for the same in the coming days.”

Yields will be under pressure in the coming days, but “it all depends where the RBI draws the line, otherwise, the 10 year yield can cross 7.50 per cent,” said Mehta of BofA. 

The central bank may have to eventually step in as an active buyer of government bonds, but even if it does so to cool yields, direct monetisation of government deficits is not allowed.

The central bank announces its monetary policy on February 9, and the market will now keenly watch its stance on liquidity.

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