Lower H1 borrowings to ease yields

A lower-than-expected government borrowing programme for the first six months, apart from falling interest rates, will help bond yields trend downwards from the current 7.88% level.

Arvind Mayaram, economic affairs secretary, said India will borrow a gross Rs3.49 lakh crore in the first half of the new fiscal year that begins on April 1, which is 58% of the full-year borrowing target, much lower than 65%  expected by the Street.

This could include inflation-linked bonds “that will protect savings from inflation, especially the savings of the poor and middle classes”, the finance ministry said in a note.

India plans to borrow Rs5.79 lakh crore in the full financial year, excluding Rs50,000 crore of bonds it will sell to fund a buyback.

Lower borrowings by the government help ease liquidity and the crowding-out effect on private sector.

The lower the borrowings, the lesser the upward pressure on interest rates.

Meantime, the Street is expecting a rate cut of 25 basis points by the Reserve Bank of India (RBI) on Tuesday’s mid-quarter policy review on the back of decline in core inflation and fiscal consolidation efforts by the government.

“Tomorrow, hopefully, a 25 basis point cut by the RBI should happen, which will support the bonds. And to top that, the government’s programme of borrowing only 58% is also positive of the bonds. It will also support bonds yields going down,” said N S Venkatesh, head of treasury at IDBI Bank.

10-year government bond yields could fall to 7.60% levels in the first six months, depending on Tuesday’s and future rate cuts by RBI, according to Venkatesh.
A dovish outlook by RBI on Tuesday can push yields down to 7.80% levels by day end.

@MeghaMandavia