Yields on 10-year government securities are expected to touch 8 per cent, thanks to expectations of an end to easy-money policy, prospects of large government borrowings and rising inflation.
While 2009 began on a soft note, with the yield on 10-year government securities at 5.25 per cent, the year ended with the yield hovering around 7.70 per cent, a 250-basis-point rise in 12 months.
First, it was funding of large stimulus packages and planned record borrowings (of Rs 451,000 crore) in 2009-10 that pushed up yields on g-secs. In October, the Reserve Bank of India (RBI) signaled an end to the easy-money policy, which pushed up yields further. And, with monetary tightening looking imminent in the wake of rising inflation, the price of government paper (yields and prices have an inverse relationship) has come down further.
Hitendra Dave, HSBC India’s co-head for global markets, said the recent rise in bond yields reflected the uncertainty about how RBI’s policy would unfold, though the central bank had been flagging issues.
Higher yields mean lower value of banks’ bond portfolio. Besides, with banks required to mark-to-market their portfolios, there could be an impact on their bottom lines too.
“Ironically, if the Reserve Bank of India moves faster, bond yields will be capped at 8 per cent. But if it does not, yields could break at 8 per cent. Inflation is no longer restricted to just food items,” said Pankaj Vaish, managing director and head of equities & fixed income liquid markets at Nomura Financial Advisory & Securities (India).
Citi group Chief Economist for India Rohini Malkani said that in the base case, the yield could be around 7.75-8 per cent. But there could be aggressive monetary tightening if inflation based on the wholesale price index crossed the 8 per cent mark. This could result in the yield edging to 8.5 per cent, she said.
Bank of Baroda Chief Economist Rupa Rege Nitsure said spiraling food prices and higher crude oil prices could mean that the yield on the 10-year benchmark paper could be 7.85-7.90 per cent by March.
Yields could soften only if the government laid bare a clear-cut fiscal consolidation roadmap. But IDBI Gilts Managing Director G A Tadas said the extent of easing could be up to 10 basis points. Market players such as Kotak Mahindra Bank Group Treasurer Mohan Shenoy said the upward journey of the yield would be accompanied by a steepening yield curve. The difference between yields on one-year and 10-year bonds will grow. At present, the gap is 310 basis points.
