Bond market investors were in for a rude shock as the Union Budget pegged the budgeted gross market borrowing number for the next fiscal at Rs 14.95 trillion.
Net borrowing, meanwhile, will be Rs 11.19 trillion in 2022-23, as against Rs 7.76 trillion in this fiscal. This higher-than-expected government borrowing pushed yields on 10-year government bond to nearly 6.9 yesterday, rising to their highest level in nearly two years. The yields had risen over 2% on Tuesday and half a per cent yesterday.
Even though bond dealers pointed out that the budget documents may not have accounted for the switch with the Reserve Bank of India done on the eve of the Budget, which should lower the gross and net borrowing for the next fiscal by at least Rs 63,648 crore.
Still, the numbers are much higher than the market expectations that ranged from Rs 10 trillion to Rs 13 trillion. We spoke to Joydep Sen, an independent debt market analyst, to understand if there’s more to the yield spike than the govt’s borrowing plan. He said:
- Higher fiscal deficit, govt borrowing implies more bond supply
- This can push interest rates up
- Budget’s silence on Global Bond indices has unnerved markets
- FM’s categorical decline on the same also soured bond market mood
Markets were expecting some policy statement on inclusion of India’s sovereign bonds in global bond indices. A green flag to the move could have led to an inflow of roughly around $20-40 billion per year, according to analysts’ estimates, and would have provided the much-needed demand support for G-Securities.
What’s also worrying investors is that the high borrowing number will also put the RBI’s actions in spotlight as it juggles between the role of a monetary authority and banker to the government.
The bond yields have pushed up sharply already in response to RBI’s liquidity withdrawal. And now, as no new avenue for foreign investors were announced in the budget, the yields could zoom further.
UBS Securities, for instance, sees the 10-year bond yield at 7.5%, which will be negative for valuations of stocks. Those at HSBC, meanwhile, are mildly bearish on India government securities amid forecasts of higher yields. In a post-Budget report, the brokerage said: “In our view, it will be difficult for the market to absorb such massive supply in the absence of support from the RBI and a time when banks may not have as much appetite for holding government bonds given normalising liquidity conditions and the improving economy. Therefore, we raise our forecasts for 10-year G-sec yields to 7.5% by Q2CY22 and 7.8% by the end of Q4CY22”
From equities’ perspective, analysts are divided on the impact of such sharp yield movement on them. According to UBS, the feedthrough of fiscal math into bond yields could be negative for equity valuations, which remain expensive despite recent sell-off.
But Joydeep Sen believes, since Indian equities never had a pronounced relationship with bonds, the impact may be limited. He said: “Correlation between bonds, equities are not pronounced in India. Distinct factors drive Indian equities. Global factors can affect equities going forward.”
Against this backdrop, bond yield movements will be a key trigger for markets today. That apart, weekly F&O expiry, December quarter results, Services PMI data, and global cues will be the other indicators.
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