10-year bond yields seen at 8% in 6-7 months

The scheduled government borrowing programme for this year was completed last week. US treasury yields softened post payroll data and through the continued global risk aversion last week. Rupee liquidity remains ample for the moment.

All this should give some relief to the government bond market in the short run. However, there are concerns in the medium term. The gross borrowing programme is likely to be large in the next fiscal. The market awaits the Union Budget later this month for clarity on this score.

We could see some extra borrowing this year as well. The postponement of the 3G spectrum auction and uncertainty on disinvestment proceeds, due to stock market volatility, add to the concerns on the fiscal deficit front. If the current trend on global risk aversion persists, it could put further pressure on fiscal deficit as well. Inflation also remains a concern, and WPI should touch 8.5% next month, though food and global commodity prices seem to be plateauing for now.

The next fiscal will be the second year in a row that we will need astute bond supply management by RBI. For now, we could see 10-year bond yields approach 8.00% in the middle of the next fiscal.

(Ananth Narayan G, MD, head of rates, FX and Credit, South Asia, Financial Markets)