Union Budget 2023: Government bond yield eases post expected market borrowing figures

FM Nirmala Sitharaman outside Finance Ministry on Budget Day 2023

The yield on India's benchmark 10-year government bond fell over 4 basis points after the Finance Minister Nirmala Sitharaman on February 1 announced market borrowing figures which is in line with market expectations.

At 12:24 PM, the yield on the 10-year benchmark 7.26 percent 2032 bond was trading at 7.3165 percent compared to the last close of 7.3438.

During the start of the speech, yields rose by over 4 basis points (bps) to 7.3891 percent.

The Centre will borrow a record Rs 15.43 lakh crore from the markets in 2023-24 to finance its fiscal deficit of 5.9 percent of Gross Domestic Product, Finance Minister Nirmala Sitharaman said in her Budget speech in Parliament on February 1.

On a net basis, the Centre's borrowing for next year has been pegged at Rs 11.8 lakh crore, up from Rs 11.19 lakh crore in 2022-23.

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Bond yields and prices move in opposite directions.

The Economic Survey 2023, tabled in the Parliament on January 31, said the trading volume of government securities (G-Sec), including treasury bills and state development loans, touched a two-year high during the second quarter of the current financial year.

Private Sector Banks were highest traders in the secondary market during the Q2FY23, with a share of 25.0 per cent in “Buy” deals and 24.8 per cent in “Sell” deals in the total outright trading activity.

This was followed by foreign banks, public sector banks, primary dealers and mutual fund.

Also read: Economic Survey 2023: G-sec trading volume zooms to two-year high in second quarter of FY23

Yields move upwards

So far, since last budget in 2022, the yield on the government securities, especially on the benchmark bonds has risen more than 7 percent.

According to Economic Survey 2023, the monthly average yield on the 10-year government bond stood at 7.3 per cent in December 2022 after having peaked at 7.5 percent in June 2022.

Yields moderated in November and December 2022 following smaller rate hikes by major central banks and declining inflation. With the softening of yields, volatility also declined in the second half of 2022.

The rise in yields in 2022 witnessed due to higher borrowings figures announced by the government in the previous budget and aggressive rate hike by the central bank across globe, including the Reserve Bank of India (RBI).

The RBI, since May 2022, has increased repo rate by 225 bps to 6.25 percent to beat the persistent higher inflation.

Further, the government in the previous budget had set a gross borrowing target of Rs 14.95 lakh crore for FY23. This was later reduced to Rs 14.31 lakh crore after the Reserve Bank of India’s (RBI) switch operation contributed Rs 63,500 crore in February.

Moreover, the government had announced that it would borrow Rs 8.45 lakh crore in the first half of the current financial year but ended up borrowing Rs 8.29 lakh crore.

It planned to borrow the balance amount of Rs 5.92 lakh crore (or 41.7 percent of Rs 14.21 lakh crore) in the second half of 2022-23 (H2FY23) through dated securities, including Rs 16,000 crore through sovereign green bonds, according to a finance ministry statement.