'India's 10-yr sovereign yield may be 6.40% by March 2022'

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SME Times News Bureau | 25 Feb, 2021
As bond yields continue to rise, India's 10-year sovereign yield is likely to rise from 6.00 per cent in March 2021 to 6.40 per cent by March 2022, said a report by Acuite Ratings and Research.

It said that the 10-year G-Sec yield bottomed out at an average level of 5.82 per cent in July 2020. Since then, it has been gradually creeping up, with over 16 bps of up move happening in 2021 so far.

"With FY21 coming to a close, we now expect the 10Y G-sec yield to trade close to 6.00 per cent levels (vis-a-vis our earlier estimate of 5.85 per cent) by Mar-21 on account of wider than anticipated fiscal deficit in FY21 and FY22," it said.

With borrowing requirement remaining high, the RBI is likely to continue supporting the bond market through OMO purchases and Operation 'Twist'. In FY21 so far, the RBI has absorbed 28 per cent of the net G-sec supply.

A similar response would be warranted from the central bank in FY22 to ensure non- disruptive conclusion of government's borrowing programme.

"Taking all the above into account, we expect the 10-year G-sec yield to increase towards 6.15 per cent (vis-a-vis our previous estimate of 6.00 per cent) by Sep-21 and further towards 6.40 per cent (vis-a-vis our previous estimate of 6.20 per cent) by Mar-22," it said.

As per the report, the hardening of yield has played out despite the continuation of status quo on policy rates along with reiteration of accommodative policy stance, and sharp deceleration in CPI inflation.

It noted that while the RBI's Monetary Policy Committee (MPC) has maintained status quo since May 2020, the forward guidance on continuing with the accommodative stance as long as necessary, to revive growth on a durable basis and mitigate the economic impact of Covid, got unanimously reiterated in the last policy review in February 2021.

With retail inflation decelerating sharply over Dec-Jan FY21, there is a strong likelihood that average inflation in FY22 would come lower to 5.0 per cent despite increase in global commodity prices and some demand led inflation from the anticipated strong V-shaped economic recovery, the report said.

"This is likely to provide some comfort to the MPC, which saw inflation remaining above their tolerance threshold (at 6.0 per cent) for major part of CY 2020," it said.

The pressure on G-sec term premium has been building up during the course of FY21 as the effective monetary policy rate switched to reverse repo amidst excess liquidity conditions, while market participants factored in risks of Covid-led substantial fiscal slippage, it said.