Home / Budget / Bond market stares at a massive government borrowing program

MUMBAI : Finance Minister Nirmala Seetharaman’s budget has served a jolt to the bond market with a higher than anticipated government borrowing plan and fiscal deficit target for the next fiscal year. It has equally taken the banks by surprise as they are now staring at mark to market loss on account of yields inching up.

The government has indicated that it plans to borrow as much as 14.95 trillion from the debt market, according to the budget document, higher than the expected 12.5-13 trillion. Net borrowing after redemptions is estimated at 11.59 trillion. Further the net borrowing for states has been pegged at 3.5% of GSDP, adding to the total borrowing number.

Following the news, yield on the 10 year government security spiked to a 2 year high of 6.89% during trade before it closed at 6.84% on Tuesday.

The sell-off in the bond market was further accentuated by the omission of details regarding the inclusion of sovereign bond in the global indices. The Revenue secretary however clarified in the post budget press conference that the government is currently in discussion over the right to impose capital gains tax on these transactions.

Bond dealers say that the government borrowing is higher than even during the pandemic time, which has resulted in a huge demand-supply mismatch. The market is therefore expecting 10 year yield to inch touch 7-7.25% in the coming months.

“The higher than anticipated fiscal deficit and gross borrowing at nearly Rs. 15.0 trillion, along with no update on measures to facilitate the awaited bond index inclusion, pushed up the 10-year G-sec yield past 6.88% intraday, wiping out the benign impact of the switch/conversion announced yesterday. The large dated borrowing coupled with the impending repo rate hikes can push the 10-year yield to 7.0% within the next quarter, which will set the stage for an upward shift in the entire yield curve," said Aditi, Nayyar, chief economist, ICRA

According to Dhawal Dalal, chief investment officer-fixed income, Edelweiss Mutal Fund, “Given the borrowing requirement from both centre and state in FY23 along with corporate borrowing, total gross borrowing is expected to be close to 30 trillion. This is taking place at a time when global bond yields are hardening. It’s going to be an uphill task for the market participants to support such large borrowing without impacting yields."

That said the market is awaiting some clarity over the inclusion of sovereign green bonds in the borrowing program. Bond market participants are of the view that if foreign investment is allowed in these bonds, then the extent of borrowing that the domestic players will have to support will come down.

The borrowing announcement has come as a bolt from the blue even for banks, which had bought the new 10 year at a coupon of 6.54% in January. The yield on this paper is currently hovering around 6.82%.

“If the yields continue to rise, banks will have to make provisions on the MTM losses before March 31. This will be a huge burden on banks," said the head of treasury at a public sector bank.

With greater clarity about next year’s government borrowing program, the bond market is now expecting Reserve Bank of India to announce some policy measures in the upcoming monetary policy meeting. Dealers are expecting the central bank to do an Operation Twist, which is the simultaneous buying and selling of bonds to help manage the yield. A possible hike in reverse repo rate is also not being ruled out to support an expansionary budget.

Gopika Gopakumar
Gopika Gopakumar has worked for over 15 years as a banking journalist across print and television media. Her expertise lies in breaking big corporate stories and producing news based TV shows. She was part of the 2013 IMF Journalism Fellowship Program where she covered the Annual & Spring meetings of the International Monetary Fund in Washington D.C. She started her career with CNBC-TV18, where she also produced a news feature show called Indianomics and an award winning show on business stories from South India called Up South. She joined Mint in 2016.
Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
More Less
Recommended For You
Get alerts on WhatsApp
Set Preferences My ReadsWatchlistFeedbackRedeem a Gift CardLogout