MUMBAI: Tasked with managing a high flow of government papers to the tune of Rs 12.1 lakh crore next fiscal, the Reserve Bank will have to let the yields spike unlike last year when the bank could tame it under 6 per cent, says a report.
Crisil on Monday said it sees the benchmark yields settling at around 6.2 per cent by this March and rise to 6.5 per cent by March next year, which 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.
Inflation is likely to double to 8-10 per cent next fiscal due to the rise in economic activities, as per the report.
That bond yields would be heading north was clear on the Budget day, with yields spiking over 10 basis points, and then continued the upward trend on February 5 when the central bank announced phased unwinding of the massive liquidity given during the lockdowns.
The bond market is once again facing a gigantic borrowing programme by the central government to fund economic revival, the report titled ‘bond fatigue, dwindling options’ said.
During the pandemic-hit 2020, the yields strayed from fundamentals and dropped to decadal lows despite a record rise in government borrowings, it noted.
The report also warned that 2021 will be different for many a reason. For one, the recovery is gaining momentum, implying a pick-up in credit growth, which is seen nearly doubling to 8-10 per cent in FY22. This also means that banks will now have more options than the government to lend to, which could put some pressure on G-Sec yields.
Secondly, RBI will have to keep an eye peeled for inflation amid an expansionary fiscal expansion and the rising input costs, though in general, inflationary pressures are expected to remain under control.
Though the central bank is not short on ammunition now, it may need to turn back the accommodative tap if inflation rises.
Thirdly, RBI is concerned about easy liquidity fuelling asset-price inflation and destabilising markets.
The Centre will borrow Rs 12.1 lakh crore next fiscal, the amount will be less than Rs 12.8 lakh crore in fiscal 2021 but much higher than Rs 7.1 lakh crore in financial year 2020. Besides, stressed states will also borrow heavily.
The sharp fall in economic activity, high uncertainty and risk aversion culled bank credit growth in FY21 forcing banks to park money in safe-haven G-Secs much above the SLR requirement of 18 per cent at 25.7 per cent in March 2020 to 28.6 per cent in December 2020.
But as the economy recovers, bank credit is expected to improve, affecting demand for G-Secs. Therefore, the report estimated bank credit growth to double to 8-10 per cent next fiscal. Simultaneously, an increase in spending leading to dis-savings by households could moderate deposit inflows at banks.
But the one of the biggest worries is the rising crude prices which could also lend an upside to yields. Brent crude may jump to USD 50-55 a barrel this year, almost USD 10 higher than in 2020.
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 as inflation may play spoilsport.