Investors await RBI measures for bond market after government raises borrowing: Report

The cost of funding rose after the Centre said on May 11 that it had increased borrowing for FY21 to Rs 12 lakh crore – a 50 percent hike compared to FY20, and up from the Rs 7.8 lakh crore budgeted in February. The increase is to tackle liquidity concerns arising from the coronavirus pandemic.

There are concerns of oversupply of bonds in the market, due to which both sovereign and corporate bonds rose by 20 basis points, The Economic Times reported. (1 bps = 0.01 percentage point)

In lieu of this, investors are looking at the Reserve Bank of India (RBI) to announce open market operations (OMOs) worth Rs 2.5-3 lakh crore to restore demand for government bonds.

Naveen Singh, the head of trading at ICICI Securities Primary Dealership, told the paper that the borrowing rise was expected, but “not so early.”

The bond buyback is expected as the market is “not in a position to absorb the excess and ripples will be felt unless supporting action comes from the RBI,” Rajeev Radhakrishnan, the head of fixed income at SBI Mutual Fund, told ET.

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The differential between corporate bonds and government debt—which indicates volatility—also widened to 120-130 bps. The gauge for double-A rated names is at 330-400 bps and investor “nervousness” was visible in the sporadic trades, it noted.

Ajay Manglunia, the managing director and head of debt capital market at JM Financial, told the paper that - unless the RBI steps in - the spread may widen more with companies raising bonds having to pay more now.