14 Feb 2022

Potential shortfall of Rs 5 trillion in demand for g-secs and SDLs for FY23

Heavy supply of G-secs and SDLs for fiscal 2022-23 is seeing a huge gap in demand and this will lead to rising g-secs yields or higher inflation if RBI prints money to invest in g-secs.

author dp
Team INRBonds
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Banks are the largest holders of g-sec with close to 38% holding. With a deposit base of Rs 150 trillion, growing at 10% annually, banks will absorb around Rs 3.2 trillion of g-secs in FY23 assuming they invest 20% of their incremental deposits in g-secs. SLR is at 18% of deposits.

Given a net borrowing of Es 11.8 trillion, banks would have to offtake at least Rs 4.5 trillion of g-secs to keep the demand and supply dynamics of government bonds for fiscal 2022-23. There is a shortfall of Rs 1.3 trillion in banks demand for g-secs. Along with SDLs, which are also considered for SLR, bank’s demand shortfall could be close to Rs 5 trillion assuming banks need to take up 38% of total SDL supply of Rs 10 trillion.

RBI has to step up its purchases of g-secs and SDLs and also get g-secs included in global bond indices and encourage retail investments in g-secs to plug the gap in demand.

Holding of government bonds-

Commercial Banks
(%)

RBI(%)

Insurance Companies
(%)

Mutual Funds(%)

Foreign Portfolio
Investors(%)

Provident Funds
(%)

Others(Include.
State Governments)(%)

Sep 2021

37.82

16.98

24.18

2.91

1.81

3.77

8.79

Mar 2021

37.77

16.20

25.30

2.94

1.87

4.44

7.33

Mar 2020

40.41

15.13

25.09

1.43

2.44

4.72

7.17

Mar 2019

40.28

15.27

24.34

0.35

3.22

5.47

6.46

Mar 2018

42.68

11.62

23.49

1.00

4.35

5.88

6.30

Mar 2017

40.46

14.65

22.90

1.49

3.53

6.27

5.98

Source:RBI

 

For FY23, gross market borrowing has been set at Rs 14950 billion while net market borrowing pegged at Rs 11186 billon. Assuming government bond holding pattern as in above table to continue, a tentative distribution of government bond absorption will be like below for next fiscal year. 

Holder

Percentage of holding

Holding amount (Rs billion)

Banks

38.00%

4250.68

Insurance companies

25.00%

2796.50

RBI

16.00%

1789.76

Mutual Funds

2.50%

279.65

Provident Funds

4.50%

503.37

FPI

2.00%

223.72

Others (State govt, corporates and non-bank PDs)

12.00%

1342.32

Total

100.00%

11186.00

 

 

Holding of SDLs (%)

Month

Banks

Insurance
Companies

MFs

Co-operative
Banks

FIs

PFs

Others
(Inclu. State Governments)

Sep 2021

35.94

27.50

1.97

3.60

1.72

18.27

11.01

Mar 2021

33.69

30.04

1.82

4.05

1.86

22.00

6.54

 

Government bonds, SDL and OIS yield movements

 

Last week, 6.54% 2032 paper yield came down by 18 bps to 6.70% while 6.10% 2031 yield fell by 20 bps to 6.70%. 5-year benchmark bond, 5.63% 2026 yield fell by 28 bps to 5.77%. 6.64% 2035 yield fell 22 bps to 7.06%. Long-term paper, 7.16% 2050 yield fell by 26 bps to 7.19%.

 

The spread of 10-year bond over 5-year bond rose to 94 bps from 85 bps in previous week. The 15-year benchmark over 10-year benchmark spread declined to 32 bps from 37 bps while 30-year benchmark over 10-year benchmark spread decreased to 45 bps from 54 bps on weekly basis.

 

Average 10-year SDL auction cut-off rose to 7.32% from 7.21% in previous week while spread rose to 49 bps from 36 bps.

On weekly basis, 1-year OIS yield came down by 20 bps 4.35% while 5-year OIS yield decreased by 18 bps to 5.73%.

 

 

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