Govt bond yields rise to five-month high ahead of large SDL supply

Benchmark 10-year yield closed at 6.60%, the highest since March, as higher SDL supply and Fitch's reaffirmation of India's BBB- rating weighed on sentiment

Government bond yields rose to a five-month high on Monday ahead of higher state bond supply at the weekly auction on Tuesday, dealers said. Additionally, Fitch Ratings affirmed India’s rating at ‘BBB-’ with a stable outlook, which further weighed on sentiment.

 

The yield on the benchmark 10-year government bond settled at 6.60 per cent, the highest since March 27, compared with the previous close of 6.55 per cent.

 

“The higher supply at the state development loans (SDL) auction, which is over Rs 10,000 crore more than the calendar amount, led to sell-offs,” said a dealer at a primary dealership. “Fitch’s decision not to upgrade the rating also dampened sentiment,” he added.

 

Earlier this month, S&P Global Ratings upgraded India’s sovereign rating to ‘BBB’. However, Fitch maintained its existing assessment, cautioning that while India’s growth outlook remains robust and external finances are solid, government finances continue to be a credit weakness. It noted that public debt is likely to rise in the current fiscal year due to weaker-than-expected nominal GDP growth. Fitch also highlighted that proposed reforms to the Goods and Services Tax (GST) regime could support growth, though they may turn out to be slightly revenue-negative.

 

Meanwhile, 15 states plan to raise Rs 34,150 crore via debt on Tuesday, compared with Rs 20,850 crore planned earlier.

 

Yields on state government bonds have hardened sharply. The 10-year SDL yield, which was in the range of 6.84–6.88 per cent in the first week of April, climbed to 7.09–7.17 per cent as of August 19. The rise has been sharper at the longer end, with yields on 30-year SDLs moving from around 6.87 per cent in early April to about 7.44 per cent in August.

 

Bond yields have surged across the board despite a 100 basis point reduction in the policy repo rate since February, which included a front-loaded cut of 50 basis points in the June monetary policy review.

 

A combination of factors — oversupply of long-duration bonds, fading hopes of further policy rate cuts, proposed GST reductions, and short positions by investors — has pushed yields higher over the past couple of months.

 

“There are no positive cues for the market at the moment. However, there could be a little bit of reversal from 6.60 per cent (yield on the benchmark 10-year bond), given technical resistance,” said another dealer at a primary dealership.

 

Meanwhile, net liquidity in the banking system fell to a surplus of Rs 1.64 trillion, the lowest since May 22, amid GST outflows. The weighted average call rate (WACR), the operating target of monetary policy, settled at 5.45 per cent on Monday, compared with the previous close of 5.51 per cent.