The yields on 10-year bonds issued by some states crossed the 7 per cent mark, which is more than 40-basis-point increase since before the Budget, indicating the struggle for the states ahead to keep their interest costs in check.
While Punjab paid 7.05 per cent coupon for its 10-year bond, Mizoram paid 7.04 per cent for its 12-year papers and Rajasthan borrowed 10-year money at 6.95 per cent.
Rajasthan, on February 2 auction, had raised 10-year money at 6.85 per cent after the Centre’s Budget where Rs 12 trillion of borrowing was announced for the next fiscal year, and Rs 80,000 crore extra borrowing for the current fiscal year was proposed. The 10-year government bond yields had shot up 15 basis points in response.
Before the Budget, Rajasthan had borrowed at 6.61 per cent.
The state development loan yields, therefore, are rising in tandem with Centre’s bond yield. The 10-year G-Sec closed at 6.074 per cent, from 5.93 per cent pre-Budget.
The state development loan (SDL) yields can rise further if the central bank does not offer support by purchasing them from the secondary market.
The RBI has done a couple of such open market operations in the past.
But it is also dependent on how the government borrowing programme is managed. The RBI will conduct an OMO of Rs 20,000 crore on Wednesday ahead of its two auctions scheduled on Thursday (Rs 22,000 crore) and Friday (Rs 26,000 crore). The expectation in the market is that the RBI will be doing more than Rs 3 trillion of OMO in the next fiscal year as well to support the bond market.
Importantly, the RBI has demonstrated that it is not comfortable with the high yields being commanded by the markets, and will likely keep the yields again back to below 6 per cent level in the next fiscal year as well.
If the yields on the government bonds are calmed, investors will chase the SDLs for higher returns, and this, in turn, can also cool the SDL yields, bond dealers say.