Bond market disappointed with borrowing plan of Centre, states

Dealers say the huge supply is a concern at a time when volumes have thinned because of Covid

Bond yields shot up on Friday as dealers expressed disappointment on heavy weekly borrowing numbers, while there was no news on private placement with the Reserve Bank of India (RBI).

Despite the government and the RBI earmarking five specified securities for foreign portfolio investors (FPI), it will take quite time for FPIs to return and collect interest on Indian papers. In financial 2019-20 (FY20), FPIs sold Rs 48,710 crore worth of debt till February, and Rs 62,000 crore in March alone.

The 10-year bond yield closed at 6.31 per cent, up from its previous close of 6.14 per cent. The rupee closed at 76.13 a dollar, compared to its FY20 close of 75.6 a dollar. The markets were closed for two days after the end of the previous fiscal. 

What has complicated matters is that states have also piled up with borrowing in the thin market. According to the latest calendar, while the Centre will borrow Rs 4.88 trillion in the first half, states will borrow about Rs 1.27 trillion in the first quarter itself. States had borrowed Rs 81,523 crore in the first quarter of the previous fiscal, said CARE Ratings in a note. 

Therefore, the Centre’s borrowing will be about Rs 20,000 crore every week, and on top of that, states will issue another Rs 10,500 crore of high-grade bonds on average every week. 

 

 

“In the first auction of state loans in the current fiscal, the amount to be raised is Rs 36,000 crore, which is the highest ever,” said Avnish Jain, head of fixed income at Canara Robeco Asset Management.

“There has been no G-Sec supply since February because of which the market has been steady. However, now that borrowings of both the Centre and states will start in earnest, demand might not keep up with supply,” Jain said. 

Bond dealers say the huge supply is a concern at a time when volumes have thinned because of the impact of the coronavirus disease (Covid-19) outbreak and nobody knows when the uncertainty would end. That has also nullified the impact of small savings rate cut.
 

“The market was also expecting some OMO (open market operations) support. That has not come. There is so much supply of bonds at a time when FPIs are withdrawing. There is clearly a demand-supply mismatch,” said Devendra Dash, head of assets and liability management (ALM) at AU Small Finance Bank. 

Soumya Kanti Ghosh, State Bank of India group’s chief economic advisor, sees the extra support as an inevitability. “Given at least 4 per cent slippage in gross domestic product estimated, or Rs 8 lakh crore, we expect the Centre and states could borrow conservatively close to Rs 20 lakh crore (trillion) in FY21. Thus, it is a must that RBI monetises the deficit, using the national calamity clause given the stressed market absorption capacity,” Ghosh wrote in a paper. 

According to Jain, FPIs are unlikely to return till the pandemic is controlled. The impact on government revenues could be severe and the combined government deficit (Centre and states) might rise. 

The government has already announced a relief package of Rs 1.7 trillion for the weaker sections of society, and there could be more to come. “Higher government deficit will likely lead to higher government bond rates in FY21,” Jain said.