The Reserve Bank of India (RBI) appears to have loosened its grip on government securities (G-Secs) yields, going through the sharp 24 basis point rise in the yield of the newly issued 10-year G-Sec in the last fortnight.
This has implications for the cost of government borrowing and corporate bond issues, which are priced at a spread to a specific G-Sec/GS along the way.
Yields on government securities rise on global signals – it is expected that rising inflation and a strong labor market in the United States could prompt the Fed to start a rate hike cycle as soon as possible. March and crude oil prices spike to around $90 a barrel due to geopolitical risks — and fears the government will borrow more in FY23 than in FY22.
RBI last year pointed out that the weighted average cost of public borrowing through primary issuances of G-Secs in 2020-21 was at its lowest level in 17 years despite an increase in net market borrowing. of the central government.
But with yields heading north, the government now has to pay more to borrow.
For example, the government raised funds in the second auction of the new 10-year G-Sec at a threshold yield of 6.784% (priced at ₹98.25) on January 28, 2022 against the threshold yield of 6 .54 percent. cent (priced at ₹100) at this newspaper’s first auction on January 14, 2022.
Thus, the yield of the aforementioned paper jumped about 24 basis points and its price fell by ₹1.75. Bond yields and prices are inversely correlated and move in opposite directions.
Therefore, unless G-Sec returns are correct, banks that bought the new 10-year G-Sec could face huge mark-to-market/MTM (investment amortisation) provisioning at the end of the day. end of the current quarter.
There might be similar MTM provisioning on other G-Secs. Mutual fund debt plans are already facing heat in the form of lower net asset values (NAVs) due to rising bond yields.
“We expect gross borrowings to be in the range of ₹12-13 billion for FY23 vs. ₹12.05000,000 for FY22 (budget/BE estimate). While the repayments pile up with an amount of ₹3.8 lakh crore in FY23 from ₹2.9 lakh crore in FY22, gross borrowings are unlikely to decline,” a said Madan Sabnavis, Chief Economist and Economists Dipanwita Mazumdar and Sonal Badhan, Bank of Barode.
BoB economists have observed that this should put pressure on yields (10yr yields currently at 6.7688%) which should hit the 7% mark in FY23, albeit gradually. They noted that interest cost is expected to be around ₹9.3,000,000 for FY23 compared to ₹8.1,000,000 for FY22BE.
“The market is increasing returns. The yield on the 10-year G-Sec could gradually increase to 7%. If there is an announcement about tax benefits for foreign investors to invest in G-Secs in the Union budget and G-secs are included in global bond indices, the bond market may recover and the 10-year G-Sec yield could soften to around 6.55 percent. But that might not last,” said Marzban Irani, CIO-Fixed Income, LIC Mutual Fund.
CARE Ratings, in a note, said total market borrowing by central government so far in FY22 (April 9, 2021-January 28, 2022) is ₹10.95 crore, 6 % lower than that of the corresponding period of FY21 (₹11.67 lakh crore). The amount raised so far in FY22 represents 91% of the total budgeted borrowing limit of ₹12.05 crore for the FY.
January 30, 2022