Bond yields rose sharply and prices came down on Monday after the government’s annual Economic Survey called for a pause in fiscal consolidation, leading to concerns that the government would widen its fiscal deficit targets when it unveils its annual budget on Thursday.
The 6.79 per cent 10-year bond yield rose by 15 basis points to 7.63 per cent, while the recently unveiled 7.17 per cent 10-year bond yield was up 13 bps at 7.44 per cent.
Chief economic adviser Arvind Subramanian said he saw less scope for monetary policy easing because of a recent acceleration in inflation, further pressuring bonds.
Aditi Nayar, principal economist, ICRA, said, “with the Economic Survey hinting at a slippage relative to the previously announced fiscal deficit targets, G-sec yields unsurprisingly extended the hardening trend seen over the recent weeks, rising by nearly 15 bps during the day. We expect G-sec yields to remain volatile in the run up to the Union Budget.”
“Looking ahead, the fiscal deficit targeted in the upcoming Budget and the reaction of the Monetary Policy Committee in its review next week to the spike in the CPI inflation will drive the outlook for the repo rate as well as G-sec yields,” Nayar said.
Dealers said the outlook for government bonds is not good given the huge supply of debt and risks from elevated oil prices, above-target inflation and hardening global yields. Forecasting further selloff, dealers said faster inflation spurring expectations that the Reserve Bank will tighten rates and concerns over a wider deficit have hit bond market sentiment.
With banks staring at huge losses on their investment portfolios due to a surge in the yield on the benchmark 10-Year bonds, RBI Deputy Governor Viral Acharya had recently pulled up the banks saying that risk management “leaves a lot to be desired” and asked them to modernise their treasury functions and adopt robust risk controls.” He also made it clear that interest rate risk of banks “cannot be managed over and over again by their regulator”.