Relationship Between Government's Bond Borrowing Plan And Bond-Yield

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    The Indian government's bond borrowing programme is decided by the centre in consultation with the RBI. Bonds are issued by the government for funding various developmental projects and fuelling growth in the economy. And banks, by way of SLR or statutory liquidity ratio ruling need to maintain 19.5% of their total held deposits into G-securities. But as against the stipulated requirement, the holding in sovereign debt instruments is usually higher at close to 30%.

    Relationship Between Government's Bond Borrowing Plan And Bond-Yield

    How bonds or G-securities work?

    But before we get ahead, we need to know the working of bond for investors as now retail investors are also allowed to invest in G-securities from the primary market. All an investor needs is a valid PAN card and in the bond market parlance primary market purchase is the one in which bond is bought directly from the entity issuing it.

    So, against the bond purchase you are assured of a steady flow of income by way of coupon rate until the maturity of the security and the principal payment is made as the term of maturity of the instrument is reached. Hence, bonds are a safer avenue bet in comparison to equity that is exposed to high volatility.

    Further bond yield is computed on the prevailing value of the bond, in case it depletes from its face value or price at which it was first sold then bond yield comes in at a higher value and vice-versa. Say for instance, if the face value of the bond issued at Rs. 100 decreases to Rs. 80 (bearing a coupon rate of 7%) then its yield would be computed as 7/80 *100= 8.75% and in the other case when the bond price rises, bond yield would come down.

    Government's bond borrowing programme and benchmark 10-year bond yield

    Now moving on to government's bond borrowing programme, which it carries out as part of its budgetary plan, there has been seen a trend reversal for the first time in 10 years, with lower borrowing planned for the first fiscal half of 2019. This has been done with a view to calm the troubled bond market and ease rising bond yields. For the H1FY19, Indian government has pegged gross borrowing via G-securities at 47.5% of its total budgeted borrowing amount of Rs. 6.05 lakh crore for the year to Rs 2.88 lakh crore instead of the otherwise 60-65% share.

    Bond-yields over the past several months have hardened due to a number of factors such as anticipation of an interest rate hike amid widening of current account deficit and tightening of liquidity in the banking system and hence to render stability such a measure has been taken. Also, demand for G-securities has declined with lower participation of public-sector banks.

    And yet again, as inflationary concerns with higher retail inflation for the month of April point to a probable rate hike by the RBI in its June monetary policy review meet, yield has surged to a high of 7.84% this week. But this time around, the government plans to stay on course with its bond borrowing plan even as bond yields have spiked and expect normalcy to restore in the bond market soon.

    Goodreturns.in

    Story first published: Saturday, May 19, 2018, 21:44 [IST]
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