A day after the Reserve Bank of India announced its second round of bond buying and selling, DK Joshi of Crisil Ltd. said fiscal headwinds resulting from greater borrowings and expenditure could cause a spike in benchmark yields.
“The central bank's operation is going to maintain yields at a low level, but beyond a point, if fiscal pressure emerges, it will show up at least in the 10-year yields,” the chief economist at the global ratings agency told BloombergQuint. “If the government borrows more, it will get reflected in yields.”
On Thursday, RBI said it would purchase Rs 10,000 crore worth of government bonds maturing in 2029 and sell Rs 10,000 crore worth of short-term government bonds maturing in 2020, in a second round of simultaneous bond purchases and sales similar to that of the U.S. Federal Reserve's Operation Twist in 2011. That's expected to lower borrowing costs.
The RBI's move comes as the long-term benchmark yield curve continues to steepen due to concerns over high government borrowings and a possibility that it will miss the fiscal deficit target of 3.3 percent this fiscal. But after the central bank's announcement, the 10-year bond yield slipped 7 basis points to 6.51 percent.
“While in the short-run the yields will be maintained around the current levels, after the budget there may be some stress in the fiscal numbers,” Joshi said. Unless the government cuts expenditure, according to him, the yields may inch up to 6.9 percent by March 2020 from current levels.
WATCH | Crisil's DK Joshi on fiscal pressures, benchmark bond yields and more.
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