Bonds hammered as govt unveils record borrowing

With the Union Budget 2022 overshooting on the gross market borrowing number by the government than initially budgeted, bond yields surged to its highest in more than two years on Tuesday. The yield on the benchmark 10year bond rose as much as 21 basis points to 6.89 per cent, the highest since July 2019 while the rupee fell 0.2 per cent to 74.74 per dollar. The 10-year benchmark yield may continue to remain at elevated levels in the absence of any intervention by RBI said experts. Bond yields and prices move in opposite direction.

The upcoming RBI monetary policy release on February 9 would be closely watched for the committee's views on the budget and any measures to manage yields.

The government's anticipated gross borrowings for FY23 came up to Rs 14.95 lakh crore, much higher than the market consensus of around Rs 12-12.5 lakh crore. The budgeted net market borrowing for FY22-23 is at Rs 11.69 lakh crore versus Rs 8.76 lakh crore for FY21-22. The revised fiscal deficit in the current year is estimated at 6.9 per cent of GDP as against 6.8 per cent projected in the Budget Estimates while for 2022-23 it is estimated at 6.4 per cent of GDP.

Bhaskar Panda, executive vice-president and head of overseas treasury at HDFC Bank, said, "The market had expected the government's net borrowing to the tune of Rs 9 lakh crore while the current estimate is around Rs 11 lakh crore which was a shocker for the bond market as a result the yields moved up. Going forward, with higher borrowing by the government and rising inflation, the 10 year benchmark yield is expected to stay between 6.70 to 7 per cent in the short term."

The markets are already reeling under weekly government bond supply with no commensurate demand to match. Auction devolvements are on the rise, indicating tepid response. Market participants were also hoping that the Union Budget 2022 would provide some roadmap towards India bond inclusion into global bond indices and also some clarity on taxation status for foreign portfolio investors (FPIs), both were missing.

Anindya Banerjee, deputy vice-president, currency derivatives at Kotak Securities, said, "The10-year bond yields were up 14 bps at 6.82 and the USD-INR spot was up 17 paise at 74.80. The Union Budget was silent on withholding tax for FPIs and overshot on the gross market borrowing number. Traders were expecting FM to announce an amendment to taxes, which is seen as a key step towards including the government of India's securities in the global bond indices. We expected it to happen eventually but for now, the market was disappointed, especially when gross borrowing was close to Rs 15 lakh crore.”