State-run banks have reduced secondary market activity, which is impacting volumes in a big way.
Hyderabad: State-run banks are selling government bonds to contain portfolio losses, causing further demand-supply mismatch in the government bond market. "State-run banks have reduced secondary market activity, which is impacting volumes in a big way. They are investing selectively in state government bonds, but staying away from federal bonds," Sandeep Bagle, associate director at Trust Capital Services told Bloomberg.
According to US-based news agency, "state lenders have been selling `470 crore of government bonds on average every day this year, hurt by deep portfolio losses." "Their sale in a market where there’s a paucity of buyers is contributing to a vicious downward spiral, where losses keep worsening. It will be difficult for debt auctions to sail through without participation from the state ba-nks when Prime Minister Narendra Modi’s new borrowing programme begins in April," Mr Bagla told Bloomberg.
Yields on the benchmark 10-year government bond has risen to a two-year high of 7.66 per cent on Tuesday, pushing stock markets lower in late trade. The yield (interest rate) on government bond was around 6.5 per cent in August 2017, which increased to 7.66 per cent on February 20 owing to concerns over the impact of rising inflation, expan-ding fiscal deficit and higher crude oil prices.
Higher bond yield would make the cost of government borrowing costly and increase interest payments by the government. A higher yield on government bonds would also impact inflows into equity markets as the opportunity cost between investment avenues get narrow. Currently, Reserve Bank of India (RBI) manages the government debt. However, rising bond yields have rekindled the demands for setting up of an independent debt management office.
"Now the time has come to seriously consider better management of India’s debt servicing obligations... interest payment is such a large part of the revenue expenditure that better management of debt servicing could substantially reduce interest payment," Niti Aayog chairman Rajiv Kumar said.