5-year bond yields jump on extra borrowing
RBI announces OMO of ~10,000 crore for bonds issued by 15 states
The yields on the five-year bonds jumped on Friday, but the benchmark 10-year remained relatively stable after the Centre announced extra borrowing of ~1.1 trillion, to be raised equally in five- and three-year tenures, to compensate states on Good and Services Tax shortfall. The Reserve Bank of India also announced a ~10,000 crore secondary market purchase of state bonds.
The yields on the five-year bonds jumped on Friday, but the benchmark 10-year remained relatively stable after the government announced extra borrowing of ~1.1 trillion, to be raised equally in five- and three-year tenures, to compensate states on good and services tax (GST) shortfall.
Separately, the Reserve Bank of India (RBI) announced a ~10,000 crore secondary market purchase of state bonds — it’s first in history — to be conducted on Thursday next week. The open market operations (OMOS) of state development loans (SDLS) were announced in the monetary policy to bring down yields of the state bonds so that they can borrow near about the cost the Centre is paying for its borrowing.
In the first such SDL OMO, the RBI will buy bonds of Andhra Pradesh, Arunachal Pradesh, Assam, Bihar, Chhattisgarh, Goa, Gujarat, Haryana, Himachal Pradesh, Jammu & Kashmir, Jharkhand, Karnataka, Kerala, Madhya Pradesh, and Maharashtra. Other states will likely find space in later OMOS. The RBI has not fixed amount earmarked for how much OMO of state loans it will eventually do, but the central bank will likely chip in to cool the borrowing costs of state as and when required.
However, the need for extra borrowing by states is significantly reduced now as the Centre is now borrowing on their behalf. This can help raise the money at much cheaper rates than what the states would have paid themselves to borrow from the markets.
Bond dealers as such didn’t seem very perturbed with the extra borrowing, but said the initial reaction on the five- and three-year bonds would be adverse because they also declined substantially after the policy on October 9.
The yields on the 10-year bond closed at 5.93 per cent from its previous close of 5.89 per cent, the five-year bond closed at 5.26 per cent from its previous close of 5.16 per cent. The yields on the three-year bond rose to 4.74 per cent, from its previous close of 4.71 per cent on Thursday.
“Though the incremental borrowing will put pressure on the market, it will put an end to the Centre-state GST shortfall controversy, at least for the time being. It does away with the incremental state borrowing on this count,” said Joydeep Sen, fixed income consultant at Phillip Capital.
Besides, the government is raising money for the shortfall in GST cess and not for its other expenditure, and hence the deficit is being maintained for now, bond dealers and economists said.
“While the overall supply/demand balance (across state + central government) of bonds is unchanged, we see this as a negative near-term development. However, while the government’s financing challenges (due to the wider fiscal deficit) remain, they may now be less inclined to rely on market borrowing to finance this gap,” said Nomura.
“Irrespective of the market’s knee-jerk reaction on Friday, one feels that the current set of announcements will eventually help in reducing uncertainties and anchoring market sentiment over the coming weeks, especially given the intelligent selection of the maturity buckets for the additional borrowing that enjoy strong demand,” said Siddhartha Sanyal, Bandhan Bank's chief economist and head of research. “The current announcements may lead to further flattening of the yield curve, thereby inducing better transmission of the RBI'S monetary easing,” he said.
Following the government’s announcement, the RBI came up with a revised issuance calendar where it said the amount would be raised at ~55,000 each in three years and five years’ securities.
With this, the government will be borrowing ~4.88 trillion for the rest of the fiscal year. On September 30, the RBI had said the government planned to borrow ~4.34 trillion for the second half of the fiscal year. Of this, ~28,000 crore has been raised earlier, and another auction of ~28,000 crore was on Friday. The auctions under the revised calendar will start from next week.
The bond market has heaved a sigh of relief after the October 9 monetary policy. The central bank had assured ample support to the market, and doubled the secondary market bond purchase programme to ~20,000 crore.