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The 10 basis-point increase in yields of the benchmark 10-year bonds on April 15 soon after the first auction under G-Sec Acquisition Programme (G-SAP) ended, has raised concerns about the efficacy of the new structured purchase programme initiated by the Reserve Bank of India (RBI). The increase in yields will surely rule out any interest rate cut going forward.

The spike in wholesale price-based inflation (WPI) to over 8-year high of 7.39 % in March on rising crude oil and metal prices, way above the expected levels, has made the situation difficult. The WPI inflation was 4.17 % in February and 0.42 % in March 2020.

On April 15, the central bank purchased Rs 25,000 crore worth of bonds of five different maturities under its first G-SAP auction. It bought the benchmark 10-year bonds worth a little over Rs 7,500 crore at a cut-off yield of 6.03%, and bonds of four other maturities for Rs 17,500 crore, at varying cut-off yields. The central bank had announced it would purchase Rs 1 lakh crore worth of bonds during the first quarter of 2021-22.

“In the first G-SAP auction, market participants offered over Rs 1 lakh crore worth of bonds over five securities of different maturities across the yield curve. As announced earlier, the central bank bought bonds worth Rs 25,000 crore,” said Vinay Pai, head-fixed income, Equirus Capital.

According to him, the RBI wants to stave off any aberration in the bond curve. “It can’t afford any huge volatility. We expect the yields to hover around 5.95%-6.20% in the first half of 2021-22, assuming there are no adverse global incidents,” said Pai.

Higher bond yield means higher cost for the government borrowing.

“The gross borrowing from the market for 2021-22 would be around Rs12 lakh crore. We plan to continue with our path of fiscal consolidation, and intend to reach a fiscal deficit level below 4.5% of GDP by 2025-2026 with a fairly steady decline over the period,” Finance Minister Nirmala Sitharaman had said while announcing the Budget for 2021-22.

On the flip side, the local/state-wide lockdowns and curfews will have a direct impact on India’s economic growth.

The rating agency CARE Ratings said the market is still not convinced and is demanding higher yields. “Pressure of government borrowing and high inflation (WPI at 7.4%) was a major shock,” it said.

The RBI is trying to keep the bond yields low while the market demands higher yields. Some market participants believe that the central bank will not be able to keep the yields low especially when the country is likely to face inflationary pressures going forward.

The RBI has been on a constant vigil to check the spike in bond yields. After having averaged 5.93% during April 2020 to January 2021, the 10-year bond yield had soared to 6.23% by the first week of March.

According to an article in the March edition of the RBI’s bulletin, the impact of a slew of measures announced by the RBI on February 5, 2021, did not last long. Global spillovers in the form of hardening crude prices, announcements of fiscal stimulus, fears over inflation, and a lukewarm response to the US Treasury’s primary auction had apparently sparked a worldwide stampede in bond markets. As the US 10-year benchmark surged to 1.6% from around 1%, bond markets in India were roiled by persistent selling and shorting, said the article.

The article cautioned that bond vigilantes could undermine a global economic recovery, unsettle financial markets, and trigger capital outflows from emerging markets. “The Reserve Bank of India is striving to ensure an orderly evolution of the yield curve, but it takes two to tango and forestall a tandav,” said the article.