A day after, bond yield closes flat at 6.16% amid liquidity surplus

The yield of 10-year benchmark bonds closed flat on Tuesday after witnessing a sharp uptick the day before in reaction to the government’s plans to borrow more from market.

The yield on 10-year government of India paper (6.45 per cent, 2029) stood at 6.16 per cent at close of trading as against 6.17 per cent on Monday.

The Reserve Bank of India (RBI) said last week that the Centre’s estimated gross market borrowing in financial year 2020-21 (FY21) would be Rs 12 trillion instead of the Rs 7.8 trillion according to the Budget Estimates. The revision was necessitated because of the Covid-19 pandemic.

Given the plan to borrow an additional Rs 4.2 trillion from the market, yields will show a tendency to move up. But, the huge liquidity in the system kept the rise in check, bond dealers said.

On Monday, bond yields surged after markets digested the revised borrowing calendar released last week, and closed at 6.17 per cent, against 5.97 per cent on Friday.

The market is awaiting clarity on the fiscal package for economic revival and how it would be funded, treasury executives added.

Meanwhile, in Tuesday’s auction for state government bonds, West Bengal paid the highest in terms of yield at 6.85 per cent in the pack of seven states that issued 10-year bonds (state development loans or SDLs). Punjab and Goa are paying 10.72 per cent, a low end of the band.

Ten states governments, including Andhra Pradesh, Tamil Nadu, Telangana, and Madhya Pradesh, are raising a cumulative Rs 10,750 crore through bonds of varying duration, according to a RBI release.

States raised Rs 59,255 crore till May 1, as against Rs 34,772 crore in same period last financial year. Their gross market borrowings stood at Rs 6.34 trillion in FY20 as against Rs 4.78 trillion in FY19, according to RBI data.

States’ revenues will be under severe pressure in FY21, yet they will have to pay salaries, pensions, and service old debt. Some of the money will come from the central government, like goods and services tax arrears. Given this backdrop, states’ borrowings might rise. The excess supply of SDLs will push yields up.

According to rating agency ICRA’s assessment of government borrowing made in April, gross SDL issuance is likely to rise about 19-23 per cent to Rs 7.6-7.8 trillion in FY21, from Rs 6.3 trillion in FY20. That factors in gross domestic product growth in FY21 and the likely revenue and expenditure impact of Covid-19.