In what could be worrying for both the Reserve Bank, which has successfully managed to keep the bond yields under check till January, and also the government in terms of higher interest payout, a report has warned that the benchmark yields can jump to 6.40 per cent by March 2022.
The yields are likely to rise from 5.82 per cent now to 6 per cent by the end of March this year, the report by Acuité Ratings said on Thursday.
The benchmark bond (10-year tenor) yields had fallen to 5.6 per cent during the peak of the pandemic crisis but have since been rising and jumped 31 bps since the Budget.
Year to date, the yields have crept up 16 bps in 2021 so far. The monetary policy setting continues to remain conducive for lower rates, both globally as well as in India.
Given the likely rate and liquidity normalisation expected next fiscal with a 25 bps rake hike, the agency expects the 10-year sovereign yields to rise from 6 per cent in March 2021 to 6.40 per cent by March 2022.
With CPI inflation decelerating, there is a strong likelihood that average inflation in FY22 would trend lower to 5 per cent from an estimated 6 per cent average in FY21 despite increase in global commodity prices and some demand-led inflation from the anticipated strong V-shaped economic recovery, likely providing some comfort to the RBI.
In fact, the pressure on G-sec term premium has been building up during FY21 as the effective monetary policy rate switched to reverse repo amid excess liquidity conditions, while market participants factored in risks of the pandemic-led substantial fiscal slippage.
With borrowing requirement remaining high, the RBI may continue to support the bond market via OMO purchases and Operation Twist, the report said.
In FY21 so far, the RBI has absorbed 28 per cent of the net G-sec supply.
A similar response would be warranted in FY22 to ensure non-disruptive conclusion of the government's borrowing programme, which is at a record high.
Taking all these into account, the 10-year G-sec yield is likely to jump towards 6.15 per cent by September and further move up to 6.40 per cent by March 2022, it said.