The yield on India's benchmark 10-year bond may rise closer to the 8 percent mark if the government, as is widely expected, decides to borrow more from the market to compensate for revenue losses, experts said.
The government is staring at a revenue loss of around Rs 1 lakh crore due to a cut in fuel duties. It also announced more measures to keep inflation in check. According to Rahul Bajoria, chief India economist at Barclays, the government may be staring at an incremental fiscal shortfall of Rs 4 lakh crore for this financial year.
In fact, bond yields have already begun to rise to price in additional debt supply for the second half of this financial year, money market experts and economists told Moneycontrol on Monday, May 23.
The benchmark 10-year 6.54 percent 2032 government bond yield jumped as much as 6 basis points (bps) to 6.42 percent intraday on Monday. One basis point is one-hundredth of a percentage point. Bond prices and yields move in opposite directions.
The government on May 21 said that it would cut excise duty on petrol by Rs 8 per litre and on diesel by Rs 6 per litre, in its bid to tamp down soaring price pressures. The revenue implication for the excise duty cut will be around Rs 1 lakh crore per year.
The government also hiked the duty on iron ore exports by up to 50 percent and a few steel intermediaries to 15 percent and offered a subsidy of Rs 200 per gas cylinder for close to 90 million beneficiaries of Pradhan Mantri Ujjwala Yojana.
“Reduced excise duty on fuel and increased food and fertiliser subsidies may result in additional government borrowing to the tune of Rs 1 trillion to Rs 1.5 trillion for the current financial year even post factoring robust tax collections,” said Sanjay Pawar, fund manager, fixed income, LIC Mutual Fund Asset Management.
The additional borrowing might hit in October-March as weekly supply is expected to remain heavy in the fiscal first half with almost 59 percent of total yearly borrowing, Pawar added.
According to Venkatakrishnan Srinivasan, founder and managing partner, Rockfort Fincap, a Mumbai-based debt advisory firm, as states also pass on the impact of the excise duty cuts, state development loan (SDL) auction amounts will also increase in the coming weeks, further straining the debt market.
Currently, states are scheduled to borrow Rs 1.903 lakh crore from the debt market in April-June. SDL auctions typically happen every Tuesday.
“The market expects that the government may probably borrow Rs 1 lakh crore over and above the huge borrowing numbers. This coupled with a decent-sized SDL auction will mean that the 10-year yield should eventually move in a 7.80-7.90 percent range,” Srinivasan added.
‘Government’s fiscal math to get disturbed’
The supply side fiscal measures aim to shield domestic consumers from global price vagaries and would have an impact on the government’s fiscal deficit target for this financial year.
In this year’s budget, the government had estimated a fiscal deficit target of 6.4 percent of GDP. Simply put, a fiscal deficit occurs when the government’s expenditure exceeds revenue from taxes and other sources. A fiscal deficit is mainly financed through market borrowings like treasury bills and government bonds. New Delhi aims to borrow a record Rs 14.95 lakh crore via bonds in this financial year.
“While it could alleviate price rises ahead, the fiscal cost to the exchequer owing to the recent measures amount to around 1 percent of gross domestic product (GDP),” said Madhavi Arora, lead economist at Emkay Global. “On net, the central government’s FY23 fiscal math is likely to get disturbed by 0.5 percent to 6.9 percent of GDP.”
“Gross dated borrowing could increase by Rs 1.1 lakh crore, despite higher net treasury bills issuance,” added Arora. “Near-term bear-steepening of the government bond yield curve may happen.”
Economists said that despite the likelihood of higher-than-budgeted tax revenue collections and the buffer from recently concluded initial public offering of insurance behemoth Life Insurance Corporation of India, the government’s fiscal risks are mounting. Hence, additional borrowing could happen in the October-March period after the government assesses its tax collections.
“We believe that fiscal first half borrowing would not be impacted, with any additional borrowing to be a function of tax upside and be pushed to October-March,” said Yuvika Singhal, economist at QuantEco Research.
Sticky inflation to persist
Despite the fiscal measures, experts said that inflation will continue to unnerve the Reserve Bank of India (RBI), and monetary tightening will continue.
RBI governor Shaktikanta Das in an interview to CNBC-TV18 on Monday said that it is a “no-brainer” that repo rate hikes will continue in the upcoming policies. The market is right to believe that another repo rate hike is likely in the June policy, he said.
“The RBI’s priority will continue to lean towards taming inflation. Our assessment is that even after the fiscal measures, inflation will stay above the 6 percent target for some time and may prove to be sticky,” said Yogesh Kalinge, vice-president at AK Capital. “Hence, any respite from the monetary side for the bond market is limited.”
QuantEco Research’s Singhal said that notwithstanding the excise cut, retail inflation is expected to be in the band of 6.1-6.3 percent for FY23, but with risks evenly balanced now.
“Given the RBI’s hawkish pivot, and our expectation of incremental rate tightening of 75 bps in a frontloaded manner, and with an upside risk to the fiscal deficit target of 6.4 percent for FY23, we now see 10-year yield moving higher towards 7.75-to-8.00 percent range before the end of FY23,” Singhal added.
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