The prospect of cheap borrowing is fading fast for the government, which will hold an auction of Rs 19,000 crore on Thursday, this fiscal year.
Wary of supply, bond dealers asked for sharp increase in rates from state governments during Wednesday’s auction. States borrowed at 150-200 basis points (bps) above government securities (G-Secs), or more than 450 bps above the policy repo rate, to raise money from the markets.
The ‘AAA’-rated public sector unit REC even withdrew a planned debt sale of Rs 5,000 crore. Kerala paid 8.96 per cent for a 15-year bond. The equivalent tenor G-Sec closed at 6.92 per cent.
What is interesting is that bond yields have shot up despite an extraordinary 75 bps policy rate cut by the Reserve Bank of India (RBI), which was accompanied by other liquidity boosting measures. The 10-year bond yields had fallen to 6 per cent, but as on Wednesday, it was at 6.44 per cent.
The government has to borrow Rs 4.88 trillion in the first half in this environment, which is getting increasingly difficult owing to the coronavirus disease (Covid-19)-induced slowdown.
Bond dealers say the yields will remain around the present level, but they don’t rule out further bond issuances. The government has not yet clarified on the extra borrowing. The expectation is that if it happens, it would likely be placed directly with the RBI.
“The market is looking at higher G-Sec issuances, than the borrowing calendar. Even after RBI rate cut and liquidity support, G-Sec yields are stagnant. Fiscal deficit target will be breached, but the extent is early to call. It depends on how soon people come back to work,” said Joydeep Sen, consultant for fixed income at Phillip Capital.
A section of the bond market expects the RBI to announce open market operations (OMO) to buy bonds from the secondary market, but not everyone is sure that that would help in boosting sentiment.
“The 10-year G-Secs are already up 200 bps above repo rate. These are unusual times. Noise, speculation, and lack of clarity over possible fiscal slippages … everything is making the market nervous. OMO is not enough, better visibility and clarity are essential,” said Soumyajit Niyogi, associate director at India Ratings and Research. The reduction of market hours is also making it difficult to gauge demand. The bond and currency markets closed at 2 pm on Tuesday, earlier than the usual 5 pm. The markets will function between 10 am and 2 pm till April 17 because of Covid-19.