Government bond yields will continue to remain under pressure over the next few months due to the expected large supply from G-Sec amid resurgent inflation and continued liquidation in global bonds.

The government plans to raise 7.24 lakh crore in the first half of 2021-2022, which represents 60% of the targeted borrowing for the full year.

The yield of the benchmark G-Sec 10-year index, bearing a coupon rate of 5.85%, hardened by around 31 basis points in the fourth quarter (Q4) of fiscal 2021, with a decrease in its price of 2.24. It closed the year at 6.1768% against 5.8653% at the end of December.

Global sales

Kavita Chacko, Senior Economist, CARE Ratings, observed in a report that domestic bond yields will continue to be under pressure as large G-Sec issuances are slated for the coming months amid a resurgence in the economy. inflation and continued liquidation of global bonds. .

At the same time, the Reserve Bank of India is expected to announce measures to anchor bond yields at its next monetary policy meeting, she said.

Chacko expects the 10-year G-Sec yield to be between 6.15% and 6.22% in April, as the language of monetary policy comes under scrutiny.

Aditi Nayar, Senior Economist, ICRA, said given the large supply of dated G-Sec and State Development Loans (SDLs) expected in the coming months as well as the likelihood of a firming of rates of global interest, G-Sec yields are expected to increase. in the absence of large and frequent open market operations.

Nayar expects the benchmark yield to harden to 6.35% by the end of the first quarter.

Relaxation accommodation

Rahul Bajoria, Chief Economist for India, Barclays Securities (India) and Shreya Sodhani, Research Analyst, Barclays Investment Bank, Singapore, noted that a premature tightening of financial conditions is being taken into account by the markets. “We see this as a signal that the markets believe the RBI will over-correct its previous policy choices. Obviously, the ghosts of a late withdrawal of post-GFC (Global Financial Crisis) stimulus are still fresh and the central bank may not want to be seen as being too late, ”they said in a report. .

The Barclays report pointed out that the RBI has already taken small steps to unwind some monetary accommodations.

So far, it has conducted floating rate repo auctions, announced a gradual 100 basis point increase in the cash reserve ratio to reverse last year’s decline, and expressed unease over the rising risks to the inflation outlook. “The markets, in turn, reacted aggressively and India’s yield curve steepened by at least 50 to 75 basis points across the spectrum,” the report said.