Bond yield rises 10 bps on govt plans to borrow Rs 50,000 cr more in FY18

Hits a high of 7.32 per cent in early morning trades, compared with a close of 7.22 per cent on Wednesday

The yield on the 10-year government benchmark bonds shot up by 10 basis points to touch a high of 7.32 per cent in early morning trades, showing market reaction to additional government borrowings of Rs 50,000 crore in 2017-18.

The benchmark 10-year bond yields had closed at 7.22 per cent on Wednesday.

According Clearing Corporation of India data, the yield on the benchmark paper (6.79 per cent, 2027) at opening were up by just two basis points to 7.24 per cent. But they later rose sharply in hectic trading activity. After touching a high of 7.32 per cent, the yield is at 7.30 per cent at present.

The Reserve Bank of India (RBI) re-adjusted the last five auction calendar to Rs 15,000 crore each, from Rs 5,000 crore scheduled earlier, to accommodate the Rs 50,000 crore of extra borrowing that the central government is planning for this financial year.

The market was expecting extra government borrowings to be between Rs 30,000 crore and Rs 50,000 crore this year. Bond dealers said market had been apprehensive the government’s 2017-18 fiscal deficit target of 3.2 per cent, which is now set to be missed, given the trends in revenue collection so far.

Among other worries weighing on the market are rising inflation, which could move up to above four per cent in the next 3-4 months. The RBI could consider increasing the repo rate in case inflation exceeds the five per cent psychological mark.

The Liquidity in the system is also getting tighter and would continue to remain so for the rest of the financial year. This can get exacerbated by the fact that households are moving progressively to the mutual funds market, according to a report by ratings agency CARE.