However, Mint Road, the Government of India’s (GoI) investment banker, again attempted to send a strong message to the local bond market on Friday by canceling the benchmark paper auction for ₹ 14,000 crore. A move to bond houses would have helped the prevailing negative sentiment.
“The cancellation of the auction signals RBI’s intention to keep yields in check,” said Naveen Singh, head of trading at ICICI Securities PD. “This prompted some traders to hedge their short positions on the benchmark, which erased the first losses in the market towards the end of the trading day.”
But markets estimate there will be higher-than-expected government borrowing to close the fiscal gap later in the year, which, in turn, will likely cause yields to rise 6.60% by now. December. “The impact of localized lockdowns could be 0.5-0.6% on GDP at the moment,” said Madan Sabnavis, chief economist,
Less taxes, more loans
“As cases escalate, the breach may be deeper in the future, prompting states or central governments to borrow more due to lost tax revenue.”
The benchmark yield has jumped 14 basis points over the past two trading sessions. The gauge erased some of its losses to close at 6.09% on Friday after the RBI auction was canceled.
State governments have planned to borrow ₹ lakh 1.78 crore between April and June of this year. The whole year figure can be more than four times. Likewise, North Block plans to borrow ₹ 12.05 lakh crore this fiscal year.
Standard Chartered Bank estimates that the oversupply of government securities and government bonds, known as government development loans, is ₹ 5 lakh crore, of which one fifth (lakh 1 crore ₹) can be supported by government securities newly introduced by RBI. Acquisition program (G-SAP). “The unfavorable balance of supply and demand is putting upward pressure on bonds,” said Nagaraj Kulkarni, senior rate strategist at Standard Chartered Bank in Singapore. “We believe that RBI’s G-SAP is still in its early stages and will be more effective as the size of the program increases in fiscal 22. In the near term, the bond market remains concerned about the ‘offer. ”
“What’s more, localized lockdowns are also weighing on investor sentiment, amid inflation concerns,” he said.
Impact of local lockdowns
On Thursday, the central bank bought sovereign papers for ₹ 25,000 crore as part of such a program involving the benchmark paper which gave a few basis points above average market expectations.
“Return expectations were getting high with the recent change in the macro and micro landscape,” said Dhawal Dalal, investment manager, fixed income, Edelweiss AMC. “While the RBI’s cancellation of the 10-year auctions sent a strong signal to keep yields in check, the bond market is still debating the intensity of localized lockdowns and their potential impact on public finances.
Inflation is another worry. Wholesale price inflation hit an 8-year high of 7.39% in March on higher crude oil and metals prices. The market expected around 6.5%. Higher than expected wholesale prices led market participants to believe that consumer prices would also rise faster, a key element in changing monetary policy measures.