Bond market shrugs off more govt borrowing
On October 9, Reserve Bank of India governor Shaktikanta Das doubled the size of open-market bond purchases and asked traders to consider their “shared responsibility” to maintain a stable market.Updated: Oct 17, 2020, 08:21 IST
The government’s additional ₹1.1 lakh crore borrowing didn’t rock domestic bond markets on Friday, with yields on the benchmark 10-year bond rising just three basis points, thanks primarily to the recent spate of central bank measures that have kept yields below 6%.
On October 9, Reserve Bank of India governor Shaktikanta Das doubled the size of open-market bond purchases and asked traders to consider their “shared responsibility” to maintain a stable market.
Late on Thursday, the Central government said it will borrow ₹1.1 lakh crore to on-lend to states struggling to fill a tax gap. This is in addition to the ₹4.34 lakh crore it plans to borrow before March-end, bringing total government borrowing in the October-March period to ₹5.44 lakh crore. The government will sell five-year bonds to raise ₹50,000 crore and issue new three-year bonds for the rest.
“The additional borrowing could put more pressure on the five-year segment due to additional supply. The market is expecting RBI support in the form of open market operations (OMOs) and in that segment also,” said Naveen Singh, senior vice-president, ICICI Securities Primary Dealership.
The Reserve Bank of India on Friday said it will conduct the first-ever purchase auction of state government bonds. “It has been decided to conduct a purchase auction of SDLs (state development loans) under Open Market Operations (OMOs) for an aggregate amount of ₹10,000 crore on October 22, 2020, keeping in view that this is the first-ever OMO purchase of SDLs. Depending on market response, the size of the auctions may be enhanced in the subsequent auctions,” a central bank statement said.
The Reserve Bank of India will buy SDLs issued by 15 states including Andhra Pradesh, Arunachal Pradesh, Maharashtra and Kerala. The tenure of the papers ranges from 9 to 10 years. The central bank added that it reserves the right to decide on the quantum of purchase of individual securities, accept bids for less than the aggregate amount, purchase marginally higher/lower than the aggregate amount, accept or reject bids.
The Reserve Bank of India’s latest monetary policy had revealed its plan to conduct an OMO of these SDLs to ensure liquidity and support state government borrowing programmes.
State governments are expected to borrow as much as ₹2 lakh crore in the third quarter, 33% higher than the actual amount of ₹1.5 lakh crore last year. This could result in increased SDL sales in the fourth quarter, as they scramble for funds amid a sharp contraction in their own tax collections and the shortfall in GST compensation cess at ₹2.35 lakh crore.
State governments have borrowed nearly ₹3.76 lakh crore through SDLs between April and the first week of October, 53.6% higher than during the same period in the previous year, according to ICRA Ratings.