With the Centre's gross borrowing at Rs 6.05 lakh crore for 2018-19 and the states likely to borrow around Rs 3.5 lakh crore, the government is in a hurry to cool the yields
Bond dealers have suggested providing tax incentives to retail investors so that they could aggressively invest in government bonds. In a meeting with finance ministry officials ahead of announcing the government's borrowing calendar, the dealers also sought an increase in foreign portfolio investment (FPI) limit in government bonds. They also demanded an increase in floating rate bonds, which is having a good appetite in the market.
With the Centre's gross borrowing at Rs 6.05 lakh crore for 2018-19 and the states likely to borrow around Rs 3.5 lakh crore, the government is in a hurry to cool the yields so that its costs are kept under check. About 60% of the gross borrowing programme is expected to be completed by September 2018. The government securities market today is flooded with bonds, which have few takers. The public sector banks have stayed away from the market as bad loans eat into their earnings and the foreign banks have been selling off their holdings to book profits.
A senior dealer who attended the meeting said, "There was a suggestion to attract retail investors by giving some tax incentives which they said was an easy way to increase the investor base. The other point mooted was increase the FPI limit in government bonds."
The FPI limit in the government securities is 5% of the total outstanding government debt. In emerging markets, FPIs hold 20% to 30% of the government debt.
Primary dealers on Wednesday also pitched for more shorter-duration bonds to help boost demand for government securities in the meeting called by the finance ministry in New Delhi. "Primary dealers feel that the shorter duration papers will increase demand for government securities which are seeing reduced buying by the public sector banks and reduce MTM (mark to market) losses," said a finance ministry official who was privy to the meeting.
Worried about the rising yields, which have shot up by close to 50 basis points in the last three months, the finance ministry called a meeting of bond dealers from across banks to get feelers from market participants on how to cool the rising yields.
"The Indian government bond market appears to be in the logjam since January 2018. Market activity as measured by average daily volume in the vibrant and liquid government bond market has declined from Rs 40,910 crore in November 2017 to Rs 25,955 crore in February 2018 according to CCIL," said Dhawal Dalal CIO - fixed income, Edelweiss AMC.
The ministry official who attended the meeting said that the government is going to take steps to ease investments in the market. Following this, the yields on the new benchmark government bond melted close to 10 basis points to close at 7.58%.
The demand for longer dated securities is absent due to surge in the yields on government bonds. PSBs, the biggest buyers of the government bonds, have stayed away from buying after incurring losses. Hardening of yields is a concern for the government, a senior government official said.
STEEP YIELD CURVE
- With the Centre's gross borrowing at Rs 6.05 lakh crore for 2018-19 and the states likely to borrow around Rs 3.5 lakh crore, the government is in a hurry to cool the yields
- The public sector banks have stayed away from the market as bad loans eat into their earnings and the foreign banks have been selling off their holdings to book profits
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The FPI limit in the government securities is 5% of the total outstanding government debt. In emerging markets, FPIs hold 20% to 30% of the government debt.
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