G-Sec Yield Rising: Government bond yields have steadily increased since the budget. Yield has seen a boom recently due to short selling by market players. According to the SBI EcoRap report, if the bond yield rises in this manner and it rises by 10 basis points from the current level, it can cause rapid fluctuations in banks’ assets or liability. In fact, government securities have a large share in the portfolio of banks. In such a situation, when the yield is high, that is, there is a negative effect on the rate of the bond, then it affects the asset quality of the banks.
The borrowing program also accelerated
Since the budget, the average rise in the bond yields of 3, 5 and 10 years has been seen near 31 basis points. AAA corporate bonds and SDL spreads have increased 25–41 basis points during this period. In the first half of FY 2021, the bond yield remained below 6% due to effective yield management by RBI. But after the budget, it has changed. The government announced its borrowing program for the current financial year. It also indicated that the borrowing program will continue in an aggressive manner in FY 2022.
Banks will sell government bonds?
According to expert estimates, the government can take a loan of more than 30 lakh crore rupees in 2021-22 to meet its expenses. This will increase the supply of additional bonds in the market. On the other hand, banks already have very high government bonds. Therefore, they may not be very interested in buying new bonds that will be issued. Here, demand for loans is also increasing. In such a situation, government banks would like to sell bonds. This can also cause instability in the bond market.
What action can the RBI take?
The report states that the Reserve Bank of India will have to resort to unconventional means to stop such a surge in bond yields, including talking to market players / market intervention, open market operations (OMOs) in illiquid securities and bond markets. Involves punishing short-sellers to control bounce. At the same time, mutual funds and insurance companies should also be allowed in the repo market.