Bond yields likely to spike to 6.5% next fiscal year, shows report

According to a report released on Monday, the Reserve Bank of India (RBI) will have to allow yields to rise instead of controlling them under 6% in 2020.

An estimated Rs 12.1 lakh crore in government papers will be handled by India’s central bank in the next fiscal year, which is in charge of the country’s currency supply and the regulation of the country’s banking system (FY).

Reasons for higher bond yield predictions

The benchmark yields, according to Credit Rating Information Services of India Limited (CRISIL), are expected to settle at around 6.2% in March and rise to 6.5% in March 2022, the company said on Monday. This is still less than the decadal average of 7.7%, which is still lower than this.

Rising fuel prices and inflation, as well as an increase in bank credit and household dis-savings following a pandemic in 2020, were cited as contributing factors to the higher bond yields predicted by this report.

Last year, yields hit a decade-low.

The increase in economic activity, according to the report, could cause inflation to double to 8-10% in the next fiscal year.

When the central bank announced phased unwinding of the massive liquidity given during the coronavirus-induced lockdowns on February 5, 2021, it was clear that bond yields would go up. On Budget Day, February 1, 2021, yields increased by more than 10 basis points.

The bond market is once again facing a gigantic borrowing programme by the central government to fund economic revival, according to the report ‘Bond Fatigue, Dwindling Options’. A record increase in government borrowings didn’t stop interest rates from falling to decadal lows during the pandemic-ravaged year of 2020. In the wake of the extraordinary easing by both the RBI and its global counterparts, the unexpected result occurred.

The next fiscal year could be ruined by inflation.

It also warned that 2021 would be different for a number of reasons.

To borrow Rs 12.1 lakh crore in fiscal year 2020, the government will borrow Rs 12.8 lakh crore in fiscal year 2021, which is less than half of what it borrowed in fiscal year 2020. Stressed states, on the other hand, are likely to rely heavily on borrowing.

The RBI’s liquidity adjustment facility absorbed an average of Rs 4.4 lakh crore per month, supporting the huge borrowing program, but an encore is unlikely in the next fiscal year because inflation may play a spoiler.

With the help of agencies, we’ve compiled this list.

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