Mumbai: Local lockdowns have started hurting the Reserve Bank of India’s (RBI) weeks-long effort to keep government borrowing costs down. Apprehensions about the economic cost of lockdowns, especially the fear that governments may borrow more to compensate for lower tax revenues, sent yields higher.
However, Mint Road, the government of India’s (GoI) merchant banker, again tried to send a strong message to the local bond market on Friday by cancelling the benchmark paper auction for ₹14,000 crore. A devolvement on bond houses would have aided prevailing negative sentiment.
“Auction cancellation points to RBI’s intent to keep yields under check,” said Naveen Singh, head of trading, ICICI Securities PD. “This prompted some traders to cover their short positions on the benchmark, which erased early losses in the market towards the end of the day’s trading.”
But markets feel there will be higher-than-estimated government borrowing to plug the fiscal gap later in the year, which, in turn, is likely to send yields as much as 6.60% higher by December. “The impact of localised lockdowns could be 0.5-0.6% on GDP for now,” said Madan Sabnavis, chief economist,
Less Tax, More Borrowings
“With intensifying cases, the dent may be deeper going forward, prompting state or central governments to borrow more due to loss of tax revenues.”
The benchmark yield surged as much as 14 basis points in the past two trading sessions. The gauge erased some of its losses to close at 6.09% on Friday after the RBI auction cancellation.
State governments have planned to borrow ₹1.78 lakh crore between April and June this year. The whole year’s figure can be more than four times. Similarly, North Block plans to borrow ₹12.05 lakh crore this fiscal.
Standard Chartered Bank estimates the excess supply of government securities and state bonds, known as state development loans, to be ₹5 lakh crore, of which one-fifth (₹1 lakh crore) may be taken care of by RBI’s newly-introduced Government Securities Acquisition Programme (G-SAP). “Unfavourable demand-supply balance is exerting upward pressure on bonds,” said Nagaraj Kulkarni, senior rate strategist at Standard Chartered Bank, Singapore. “We think RBI’s G-SAP is still in early stages and will be more effective as the size of the programme increases during the course of FY22. In the near term, the bond market remains concerned about the supply.”
“Moreover, localised lockdowns too are weighing on investor sentiment, amid inflation worries,” he said.
Impact of Local Lockdowns
The central bank on Thursday purchased ₹25,000 crore sovereign papers under such a programme involving the benchmark paper that yielded a few basis points higher than average market expectation.
“Yield expectations were going high with the recent change in macro and micro-economic landscape,” said Dhawal Dalal, chief investment officer, fixed income, Edelweiss AMC. “While RBI cancellation of 10Y auction sent a strong signal to keep yields under check, the bond market is still debating the intensity of localised lockdowns and their prospective impact on government finances.”
Inflation is another worry. Wholesale price-based inflation shot to an over 8-year high of 7.39% in March due to rising crude oil and metal prices. The market was expecting about 6.5%. Higher-than-expected wholesale prices led market participants to believe that consumer prices too will rise faster, a key trigger to change monetary policy measures.