RBI spurns investors asking for higher yields

Reserve Bank of India. Photo: Kamlesh D Pednekar
Of the bonds worth Rs 15,000 crore on offer to investors, the Reserve Bank of India (RBI) on Friday did not sell Rs 4,755.5 crore of those because of apprehensions on their part. 

Investors are asking for higher yields because they fear fiscal conditions might deteriorate and more bonds might come in.

Of the bonds worth Rs 4,755.5 crore, the RBI did not sell Rs 3,840 crore of those maturing in 2031 and Rs 915.50 crore of the ones maturing in 2022. 

Already, state governments are expected to flood the market with extra borrowings owing to their farm debt waivers. So far, some states have accommodated the extra space by cutting expenditure, but the market is not convinced that they would be spared. 

The latest inflation print, 3.36 per cent in August, and a sharp rise in the current account deficit (CAD) in the first quarter are indicating all may not be well on the economic front. Economists have started advising the government to inject a fiscal stimulus and this might mean more borrowing, even as the adjustment can be done by cutting other expenditures. 

“Against the backdrop of inflation inching up and trade deficits, the fiscal conundrum is the new addition to weak market sentiment, which is likely to keep yields at an elevated level,” said Soumyajit Niyogi, associate director, India Ratings and Research, adding that the amount of state borrowings in the second half was becoming a critical point for the sovereign and corporate bond curves.

The 10-year bond yields were at around 6.50 per cent for a few months, before they started moving up after the inflation numbers were announced in mid-September. 

In the past two days, the yields moved quickly, 12-13 basis points, as talks about fiscal expansion surfaced. The yields on the 10-year bond closed at 6.66 per cent after rising to 6.69 per cent intraday.

Bond dealers say until uncertainty regarding the fiscal plan goes, yields will be under pressure.

“Right now the market is apprehensive of extra borrowing because 92 per cent of the fiscal deficit has already been reached, but it could be possible that the government would adjust other expenditures to fund this fiscal expansion,” said a senior bond dealer with a foreign bank. 

However, one fear would be that a rising yield would push up deposit rates as well as other rates, which goes directly in the calculation of banks’ lending rates. In that case, the transmission of RBI policy would be hit. 

In the past few weeks, FPIs have shown signs of backing off from the markets. Not only they are cutting down their equity market exposures, they are also unable to invest in Indian bonds. To address this issue, the central bank opened up Rs 44,000 crore of space for these bonds by keeping Masala bonds off the total limit for corporate bonds.

But in the absence of healthy FPI demand, the extra load of a potential rise in supply falls on domestic investors, who would naturally demand a high yield, said Harihar Krishnamurthy, head of treasury at First Rand Bank. 

“There is a fear in the market. But the stimulus figures coming to the market are not directly from the government. It looks like the market is running ahead of itself,” said Krishnamurthy.

For now, bond market sentiment seems to be getting mixed with sentiment in the foreign exchange markets. 

The US Federal Reserve clearly indicated one more hike in December, and announced its plan to reduce the size of its balance sheet. As a result, the US 10-year bond yield rose to 2.30 per cent from 2.15 per cent earlier. 

“The bond market sentiment was generally not good with the dollar strengthening and US yields rising. On top of that China got downgraded on debt concerns and the domestic CAD widened. There is a fear that no rating agency would upgrade the country rating if these go on,” said the foreign bank treasurer who did not wish to be named.