MUMBAI: The yield on the benchmark 10-year bond surged on Monday following the government's announcement of higher borrowing for the current fiscal amid the pandemic-induced lockdown.
The 10-year bond yield rose 20 basis points, the biggest jump since 8 February 2017, to close at 6.167% on Monday. On Friday, the yield had settled at 5.971%.
Late on Friday, the Centre announced a sharp increase in its gross borrowing programme for the current fiscal to ₹12 trillion from the budgeted ₹7.8 trillion. Half of this will be raised by the end of September.
Brokerage firm Nomura Research estimates India’s budget deficit will widen to 7% of gross domestic product versus the 3.5% target, with output shrinking 5.2%. The brokerage firm also sharply cut its projection for India's real GDP growth in FY21 to -5.2% year-on-year from -0.4%. It now expects year-on-year growth to remain negative for three consecutive quarters.
“We expect the borrowing calendar announcement to result in some short-term pressure on bonds and swaps, which could be sustained in the absence of an announcement of OMO purchases/operation twist from the RBI. However, we do not expect the RBI to stay on the sidelines and expect further operations imminently", said Nomura Reserach in a note to its investors.
The enhanced borrowings provide the government much needed flexibility on compensating it for the expected shortfall in tax and non-tax revenue while setting aside some funding for its earlier relief package and for the one to be announced.
Many dealers expect bonds yields to rise by another 10-15 basis points if there is no clarity on open market operations (OMO) or Operation Twist from the Reserve Bank of India by Friday.
“RBI faces a choice between outright OMOs and restarting its Operation Twist, using Treasury bills. Allowing market to adjust to the new reality could result in an extremely steep yield curve in the first instance. Given the negative spill overs of a selloff in G-Sec market to SDLs and corporate bond markets, RBI may decide to start with twist operations again before resorting to outright OMOs," said ICICI-Securities Primary Dealership Limited Ltd.
Separately, speculation has been rife about another stimulus package from the government. According to Bank of America ML Global research, the government is expected to announce additional fiscal stimulus of 0.75% of GDP, atop 0.35% so far, focusing on SMEs, real estate and banks.
“I expect the 10-year bond yield to be in the range of 5.75-6.25%. There could be upwards pressure on the yield due to the fiscal deficit concerns and a simultaneous downwards pressure owing to growth concerns," said Ashuotsh Khajuria, executive director, Federal Bank.