Synopsis: RBI monetary policy meeting in the 1st week of April 2021 gains significance as it has to manage a huge government borrowing and also temper fast rising inflation expectations even as covid cases are surging. Will RBI hike rates soon?
RBI has a difficult situation to manage in the fiscal year, as it goes into the April 2021 MPC meet. The government is set to borrow 60% of its total borrowing in the 1st half of this financial year and market appetite for bonds is not high as seen in the resistance to absorb borrowing in the last quarter. RBI has been doing operation twists to keep down the long end of the yield curve. 10 year bond yield is higher by 40bps from lows seen in the last fiscal year.
Surging covid cases is again threatening a lockdown like environment that can further strain government finances. State finances too will get affected causing more borrowings from states. Heavy bond supply will put pressure on bond prices causing yields to rise.
Inflationary pressures are rising with high global commodity prices, high fuel prices and excess global liquidity. US treasury yields are spiking on inflationary pressures due to US stimulus. Core CPI is at levels of 5.9% and can rise further.
Given policy rates are at record lows and global bond yields are spiking, RBI may signal rate hikes soon as a policy normalization process on expectations of vaccine roll outs bringing back economic growth.
Government Borrowing for H1FY22
In the first half of fiscal year 2021-22, Union Government will borrow Rs 7240 billion, which is 60.03% of the total budgeted borrowing of Rs 12000 billion for full fiscal year.
From 5th April, 2021 to 24th September, 2021 RBI is scheduled to conduct 24 weekly auctions for government securities of Rs 260-310 billion.
The issuance in the 2 years maturity category is expected to be around 3% of total issuance, 5 years maturity category around 12% , in the 10 years maturity category around 14%, in the 14 years maturity category around 10.83%, in the 30 years maturity category around 7.58% while in the 40 years maturity category around 9% and Floating rate bond(FRB) category around 4%.
Maturity(year) | Borrowing amount (Rs billion) | % of total budgeted borrowing in FY22 |
2 | 360.00 | 3.00% |
5 | 1430.00 | 11.92% |
10 | 1680.00 | 14.00% |
14 | 1300.00 | 10.83% |
30 | 910.00 | 7.58% |
40 | 1080.00 | 9.00% |
FRB | 480.00 | 4.00% |
Total | 7240.00 | 60.33% |
Government bonds, SDL and OIS yield movements.
During the week, 5.85% 2030 yield rose by 6 bps to 6.18%. 5.77% 2030 yield increased by 4 bps to 6.32%. 5-year benchmark bond, 5.22% 2025 yield rose by 3 bps to 5.59%. 6.57% 2033 yield gained 4 bps to 6.70%. On the other hand, long term paper 7.16% 2050 yield came down by 1 bps to 6.80%.
The spread of 10-year bond over 5-year bond (5.22% 2025) rose to 57 bps from 56 bps in previous week. The 15-year benchmark over 10-year benchmark spread remined unchanged at 54 bps while 30-year benchmark over 10-year benchmark spread remained came down to 60 bps from 64 bps.
In the SDL auction conducted last week, average 10-year SDL yield remained stable at 6.85% previous week. Consequently spread with G-sec benchmark stood unchanged at 71 bps.
On weekly basis, 1-year OIS yield remained unchanged at 3.86% while 5-year OIS yield rose by 9 bps to 5.25%.
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