The Reserve Bank of India (RBI) will now have to let the yields spike, unlike 2020 when it could tame it under 6 per cent, according to a report on Monday.
The central bank, responsible for the issue and supply of the Indian rupee and the regulation of the country’s banking system, is tasked with managing a high flow of central government papers to the tune of Rs 12.1 lakh crore next fiscal year (FY).
Reasons behind forecast of higher bond yields
On Monday, Credit Rating Information Services of India Limited (CRISIL) said it sees the benchmark yields settling at around 6.2 per cent by this March, and rising to 6.5 per cent by March 2022. This would still be lower than the decadal average of 7.7 per cent.
The report cited high government borrowings at Rs 12.1 lakh crore, rising fuel prices and the resultant inflation coupled with rising bank credit, and dis-savings by households after the pandemic-induced savings in 2020 as reasons for its forecast of higher bond yields.
Yields dropped to decadal lows last year
According to the report, inflation may double to 8-10 per cent next fiscal year due to the rise in economic activities.
The bond yields would be heading north was clear on the Budget day on February 1, 2021, with yields increasing more than 10 basis points, and then continued the upward trend on February 5, 2021, when the central bank announced phased unwinding of the massive liquidity given during the coronavirus-induced lockdowns.
The bond market is once again facing a gigantic borrowing programme by the central government to fund economic revival, according to the report ‘Bond Fatigue, Dwindling Options’. During the pandemic-hit 2020, the yields strayed from fundamentals and dropped to decadal lows despite a record rise in government borrowings. The counter intuitive happened due to the extraordinary easing by both the RBI and its global counterparts.
Inflation may play spoilsport next FY
The report also warned that 2021 will be different for many reasons.
The Centre will borrow Rs 12.1 lakh crore next fiscal year, the amount will be less than Rs 12.8 lakh crore in fiscal year 2021, but much higher than Rs 7.1 lakh crore in fiscal year 2020. Stressed states will also borrow heavily.
While the RBI net absorbed Rs 4.4 lakh crore every month on average under the liquidity adjustment facility, and supported the huge borrowing programme, an encore is unlikely next fiscal year as inflation may play spoilsport.