MC Interview: DBS Bank senior economist Radhika Rao on why yields shot up on Budget day

DBS-LVB merger came into effect on November 27.

Why did the bond yields rise?
The bond market endured a fairly rough ride at the start of 2022, owing to a confluence of catalysts, both global (due to a sharp rise in the US yields and elevated oil prices) and domestic (due to concern over the upcoming borrowing programme and build-up in policy normalisation expectations due to sticky inflation). A few of these concerns have materialised, with the FY23 borrowing programme exceeding expectations by a considerable margin as well as little by way of clarification on corporate tax rationalisation for foreign investors to ease the path for an eventual inclusion in the global bond indices. Markets continue to count on the central bank to intervene to slow the pace of gains in the yields, in the near term.

Will the government sell sovereign green bonds in the rupee market?
The size and timing of the green bonds are yet to be announced, but being a part of the annual borrowing programme and the sovereign not being active global issuers, increases the likelihood of these being rupee securities, either in the domestic market or masala bond structure. In the non-sovereign space, banks and non-financial corporates have been active issuers of green bonds in recent years, with market data suggesting record issuance last year.

What are your expectations from the RBI policy?
Ahead of the monetary policy review, 10 year yields are up sharply, building on a 30 basis point rise on year to date basis, fuelled by strong gains in US yields, rally in oil prices, upcoming policy normalisation and anticipation of a higher borrowing programme. With few of these concerns coming to fruition, borrowing costs are bound to rise further in the near term, in the absence of open market operations or liquidity neutral OTs to cap yields. Despite the monetary policy committee’s dovish bias, evolving financial market conditions, sticky inflation and better confidence on the growth outlook will set the stage for incremental repo rate increases in the second half of 2022.