Bonds sold off sharply on Friday with the gross borrowing figure of Rs7.1 lakh crore for 2019-2020 against the backdrop of somewhat optimistic revenue projections.
On Friday, yield on the old-benchmark bonds—7.17% yielding bonds maturing in 2028, which is still the most traded security among gilts— rose as high as 17 basis points to 7.65% during the day before closing the session 13 basis points up at 7.61%. The new ten-year bonds—7.26% yielding bonds maturing in 2029—closed nine basis points higher at 7.38%.
Dealers expect a higher supply of government securities from the Centre. On top of that, the higher state government borrowings will led to overcrowding, leaving buyers with not enough appetite.
Manish Wadhawan, MD and head of fixed income at HSBC Global Markets, said the government will need to additionally borrow close to at least Rs36,000 crore, if one looks at the current fiscal year, even after adjusting for a higher dividend from the RBI.
“This might lead to an increase in the size of the borrowing or increase in the size of the auctions for the balance of the year. Effectively, the borrowing programme might have to go on till the year-end, which usually does not happen. Furthermore, the next year borrowing programme is very large with the gross borrowing figure coming in at Rs7.1 lakh crore. Add that to the gross borrowing of the states expected at around Rs5.5 lakh crore, the total gross borrowing comes to around Rs12.5 lakh crore— an increase of about Rs2.5 lakh crore compared to the current fiscal year,” Wadhawan said. At the same time, over-optimistic revenue projections also seemed to have hurt the yields.
Ananth Narayan, professor-finance at SPJIMR, said the government has projected the revised tax estimates at very similar level to the budgeted estimates.
“A shortfall of Rs1 lakh crore on GST is seen to be made up with a combination of increase in corporate tax, custom, and a lower transfer to states. However, given that the year-on-year increase in revenues has only been 4.4% for 8 months of the fiscal so far, a make up over the next four months to achieve a full year budgeted 19.5% growth in tax revenues seems difficult. It is possible that the revenue numbers may be revised down when the provisional numbers are released in a few months,” Narayan said.
Bond market experts also pointed out that it may not be prudent to expect the central bank to mirror its quantum of open market operation (OMO) purchases next year in the same way it did in FY19. If such a situation arises, the market is likely to be left with considerable supply of high quality paper, which will then have a spillover effect on the corporate bond market as well.
Lakshmi Iyer, chief investment officer (debt), at Kotak Mahindra AMC, pointed out that close to 60% of net government supply in FY19 was cushioned by RBI OMO bond purchases. “Uncertainty on how much would be the quantum of OMOs and will they actually be needed will be a uncertain sword hanging in the market,” she said.