Mumbai: The yield on the 10-year government bond, which rose to 8.01% on Monday, dropped to 7.98% on Wednesday, but dealers said it will continue to rise and may even touch 8.5% in the next three months. This is despite the government planning to borrow Rs3.45 trillion in the next fiscal year, lower than the current fiscal’s Rs4 trillion and largely in sync with market expectations.
The rising yield is bad news for companies as they need to pay more than the government to borrow from the market. It is expected that two-thirds of the government borrowing programme will be completed in the first half of the fiscal year, crowding out firms.
Graphics: Paras Jain/Mint
While companies will have to pay more to raise money, banks too will be affected as they would have to provide for mark-to-market (MTM) losses for the last quarter of the current fiscal ending April. MTM is an accounting practice of valuing securities at market price and not at the price of acquisition. With the rise in bond yields, prices drop and banks need to make good the difference between their cost of buying the debt and current prices.
The government plans to borrow less next year as it expects to raise Rs75,000 crore through disinvestment of stakes in state undertakings and auctioning high-speed mobile licences.
“I think this (disinvestment target) is pretty ambitious. In the past, the government has not been able to raise more than Rs20,000-25,000 crore in a single year from the market,” said Anoop Verma, head of money markets at Development Credit Bank Ltd.
Coupled with this, the concern that the Reserve Bank of India (RBI) has exhausted all possible means to manage the huge borrowing programme, is also dampening sentiment.
“There are concerns how the central bank will push through the borrowing programme. Unlike last year, the MSS (market stabilization scheme) buffer is no more there and as a matter of preference, RBI is not for OMOs (open market operations),” said Prasanna Patankar, senior vice-president at Securities Trading Corp. of India Ltd, a bond trading house.
Inflationary pressures: The central bank may have to raise interest rates aggressively, which is also forcing bond dealers to remain bearish. Harikrishna Katragadda/Mint
The bonds under MSS floated to flush out excess liquidity from the system were redeemed by RBI this year. The banking regulator also bought bonds previously issued by it from the open market to create liquidity.
Inflationary pressures amid few signs of global commodity prices subsiding may force RBI to raise rates aggressively, which is also forcing bond dealers to remain bearish.
“The rise in yields in 10-year (paper) has partly got to do with less trade. Firms that plan long-term paper will have to pay much higher rates at this point if they plan to come with issuances now,” said G.A. Tadas, managing director and chief executive of IDBI Gilts Ltd, a bond trading house.