Government’s massive borrowing loads pressure on RBI to tame yields

By Subhadip Sircar and Kartik Goyal

India’s central bank is under pressure to step in to keep yields in check after the government surprised bond markets with a bigger-than-expected borrowing plan.

That puts the burden on Governor Shaktikanta Das to calm the bond traders when he meets to decide policy on Friday. He’s already had to assuage them that a recent measure to mop up excess liquidity isn’t a step toward changing the RBI’s accommodative policy and the central bank has rejected bids at two auctions of benchmark debt after investors sought higher yields.


India will borrow a gross 12 trillion rupees ($164 billion) via bonds in the fiscal year beginning April, Finance Minister Nirmala Sitharaman said Monday, higher than the 10.6 trillion rupees estimated in a Bloomberg survey. Bonds sold off on the announcement, with the benchmark 10-year yield rising 16 basis points to 6.06% while the 5.15% 2025 bond yield rose 27 basis points.

“The higher borrowing is a concern for the market,” said Anoop Verma, senior vice president at DCB Bank Ltd. in Mumbai. “It will be difficult for the RBI to anchor yields around 6%.”

In contrast, the reaction to the budget from India’s equity market was favorable. Shares of Indian lenders surged, with the Bankex index rallying on a proposal to set up a company to manage banks’ bad loans, which are expected to reach record levels this year.

Yet those with an eye on bond markets like Verma want the RBI to outline when and how much debt it will buy. The central bank has been using so-called Open Market Operations off-and-on, as well as discreet secondary market purchases and Operation Twists to keep yields in check.

The battle between bond traders and the central bank played out for most of last year, with the monetary authority practicing what many called implicit yield control -- trying to keep the benchmark 10-year yield around the 6% mark.

However, the act became harder this year as the RBI began unwinding some emergency pandemic measures.

“The market will have to live with the higher borrowing,” said Soumyajit Niyogi, associate director at India Ratings & Research in Mumbai. “Continuous support of the RBI will be required.”