Impact on the fiscal market: the sharp sale of government securities continues on the shock of budgetary borrowing; mkt turns to RBI for help

Government bonds fell on Wednesday, with the benchmark 10-year paper yield of 6.54% 2032 jumping eight basis points to 6.91% as traders rushed to dump stocks after next year’s budget announced an unprecedented borrowing program.

The Reserve Bank of India’s decision to announce a two-day floating rate reverse auction further worsened market sentiment as traders interpreted the move as a signal of the central bank’s intention to bring rates closer to the overnight money market repo rate of 4 percent. hundred.

The fresh sell-off in the market comes after the 10-year paper yield hit a three-year high on Tuesday, hardening 15 basis points. Bond prices and yields move in opposite directions.

So far in the current calendar year, the yield on 10-year paper has risen 46 basis points.

In a brutal shock to the market, the Center on Tuesday announced a higher than expected budget deficit of 6.4% of GDP for the next financial year, then a gross borrowing program of a whopping Rs 14.95 lakh crore. .

Ahead of the budget presentation, the market expected a gross borrowing of around Rs 12 lakh crore-Rs 12.05 lakh crore as a last-minute gold-swap between the RBI and the Center eased redemption pressure for next year, allowing the government to rein in gross borrowing.

Given that traders were skeptical about the market’s ability to absorb the gross supply of Rs 12 lakh crore bonds, the actual borrowing is well and truly beyond the market’s absorption capacity.

“Government borrowings still come through because they are sovereign debt, but now they will be very expensive,” a foreign bank concessionaire said on condition of anonymity.

“The days when the RBI could induce yields to fall by promising open market operations (OMOs) are over. The only way to prevent yields from heading towards 7.50 percent in a short period of time is for the RBI to announce major bond purchases itself. The 2-day floating rate reverse repo is even tougher on the market as it suggests that RBI actually wants overnight rates to normalize. So lose-lose for the bond market,” he said.

The meteoric rise in sovereign bond yields does not bode well for the Center’s efforts to boost investment, as overall borrowing costs in the economy are pegged to government bond yields.

The Rupee strengthened against the US Dollar, last trading at 74.68/$1 from 74.79/$1 at the previous close.

Dealers said some degree of dollar sales by banks on behalf of exporters had supported the domestic currency.

The rupiah weakened sharply on Tuesday after the government announced a higher-than-expected budget deficit.

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