India’s bond market is not ready to breathe easy even though it got a respite on the supply side when the government effectively reduced its borrowing amount for the current financial year.
On Monday, the government left its total market borrowing unchanged at ₹12.05 trillion and said the goods and services tax (GST) compensation loan would be met through the existing borrowing.
“While there is no surprise on the market borrowing component, the subsumption of ₹84,000 crore GST compensation loan (expected to be provided to states in the second half of FY22) within the residual market borrowing amount has come as a relief,” analysts at QuantEco Research Ltd wrote in a note.
What’s more is that the supply in the most crowded 10-14 years maturities would be less than last year. The share of these tenures in the overall borrowing would be lower at 44% in the current fiscal year compared with a share of 46% in FY21. This should have given some relief on the benchmark 10-year bond yield.
But the bond yield settled higher on Tuesday at 6.23%.
Suyash Choudhary, head of fixed income at IDFC Mutual Fund, points out that the supply of state development bonds and even corporate bonds would keep this segment busy. Moreover, the reduction in borrowing for the second half has been largely in the five-year tenure.
“All of this implies a higher headwind for longer duration bonds and gives us greater confidence in our view that 5 to 10 to 15 year spreads are unlikely to fall meaningfully from here, and that the best play on the current steepness of the curve (and the best carry adjusted for duration value) is in the 5-year space,” he wrote in a note.
The upshot is that long-term bond yields are unlikely to fall much, at least in response to supply triggers. As such, it remains to be seen whether the government can stick to its promise of borrowing what it has stated it would.
The Union government has a chequered track record in sticking to its borrowing plan. Analysts at Care Ratings point out that the outlook on revenues is not all that sanguine. The disinvestment target is steep at ₹1.75 trillion and any deceleration in economic activity would hit the tax mop-up going forward.
What about demand for bonds?
Here, the chatter around the inclusion of Indian bonds in global indices is doing some good to sentiment.
But an uncertain piece is the Reserve Bank of India’s move towards unwinding accommodation.
It remains to be seen whether the central bank would discontinue with its G-Sec Acquisition Plan (G-SAP) in a move to stop adding to surplus liquidity. In a 23 September story, Mint had pointed out how G-SAP’s effectiveness has been limited in keeping bond yields under check.
As such, the Reserve Bank of India (RBI) has given signs of a change in liquidity stance by selling bonds through an open market auction last week.
That brings us to the final upsetting factor—oil prices. Fears of an energy crunch from Europe to China have gripped global markets, driving up prices of oil. Elevated oil prices sour the outlook on domestic inflation and monetary policy.
Further, the potential impact of an energy crunch on global growth may have a dampening effect on the domestic economy as well.
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