Signs from bond market
THE ESSENCE OF THE National Statistical Office’s latest data on India’s economic growth was kind of expected, especially from the point of view of financial markets. They, as participants say, had already factored in a recovery of this kind. Gross value added went up by 1 per cent in the third quarter of this financial year, turning positive after two quarters of contraction. Inflation, too, has come under control as growth finds its way, chart 1 shows.
But since the Union Budget announced additional borrowings of ~80,000 crore, bond markets are showing signs of nervousness, and yields on the 10-year government bonds are on the rise.
However, the nominal gross domestic product — including the imputed figure for Q4 — is growing slower than the long-term average, and is also lower than the long-term government bond yields, shows chart 2. As corporate bonds come at a premium over G-secs, interest rates in the corporate sector will remain higher than the rate of economic growth, making investments difficult.
A closer look at the tenor-wise changes shows that yields at the short end (treasury bills) are as low as they were before the Budget. For G-secs, yields have risen almost across all tenors, reveals chart 3. This means that market participants are factoring in higher inflation and uncertainty going into the future.
But India is not the only market facing this problem. Advanced economies are also witnessing a rise in interest rates because of rising budget deficits (chart 4).
Bond market pressure is getting reflected in the stock market as well. Chart 5 shows how the annualised three-year return on the BSE 100 index is going through a volatile phase, courtesy frequent and deep corrections in stock prices.
Interestingly, the universe of corporate bonds expanded in 2020 even as the size of India’s economy shrunk. Outstanding corporate bonds are closing in on a level of 18 per cent of GDP, shows chart 6. But at the same time, the traded volume has reduced drastically. In fact, the value of corporate bonds traded in the December quarter was less than those traded in the quarter ending September 2016. This might mean that corporate debt finance is growing, but led only by a few strong participants.