Bond yields could rise at a slower pace on growth, Covid worries

Mumbai: A weaker-than-expected growth estimate for financial year 2022 by the government's Central Statistics Office (CSO) and increased restrictions on public movements due to the spread of the Omicron variant of Covid-19 could temper the runaway rise in bond yields even as a likely increase in government borrowing weighs on traders.

Last week, the CSO estimated fiscal growth at 9.2%, which is 300 basis points (bps) lower than the Reserve Bank of India's 9.5% forecast for the year. One basis point is one-hundredth of one percent.

However, despite being lower than the Street, CSO's forecast does not factor in the fast spread of the Omicron variant, which could hit economic output in the last quarter.


The slow growth and a likely impact could lead to RBI delaying its interest rate hikes that are widely expected later this calendar year and could lead to traders rethinking their positions on rates.

"Bond yields are on the way up, but slower growth will force RBI to probably delay its hikes. We are already seeing that the central bank is uncomfortable with demand for higher yields from the market. Going forward, in the short term they may reduce bond sales, leaving some liquidity for the market. Even though the direction in yields is up, it will move slowly," said Sanjay Varshneya, head - treasury, Punjab National Bank.

Varshneya was referring to the devolvement of bonds on primary dealers on Friday. RBI accepted only ₹1,612.32 crore of bids out of the ₹6,000 crore bonds on offer for securities maturing in 2026 as dealers asked for yields higher than the 5.95% cutoff. As a result, primary dealers were forced to buy ₹4,387.67 crore of bonds from RBI.

Varshneya does not expect the 10-year yield to go above 6.60% in the next couple of months as traders will hold onto bonds rather than sell.