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The government’s cost of borrowing is likely to go up in FY22 as the Reserve Bank of India (RBI), on Friday, accepted bids at the auction of the new 10-year Government Security (G-Sec/GS) at a higher cut-off yield of 6.10 per cent.
The previous 10-year G-Sec (maturing in 2030) was issued at a cut-off yield of 5.85 per cent.
So, effectively, the government paid 25 basis points more to raise resources via the new 10-year G-Sec.
This comes in the backdrop of the RBI trying to pull out all the stops – by mopping up the 5.85 per cent GS 2030 via Special Open Market Operations (OMO) and G-Sec Acquisition Programme (G-SAP) – to keep G-Sec yields from rising. In its monetary policy report (April 2021), the RBI observed that despite a sharp increase in the quantum of the borrowings in FY21, ample surplus liquidity, regular open market operations (OMO), including special OMOs, regulatory measures and forward guidance, enabled the government to complete its borrowings at a 16-year low weighted average cost – 5.79 per cent compared with 6.84 per cent in 2019-20 – along with the highest weighted average maturity.
Marzban Irani, CIO-Fixed Income, LIC Mutual Fund, said that the cut-off yield at the auction of the new 10-year G-Sec indicates that interest rates have bottomed out and will gradually inch upwards, going ahead.
Cash raised
Overall, the government raised ₹26,000 crore through the auction three G-Secs – 4.26 per cent GS 2023 (₹3,000 crore), New GS 2031 (₹14,000 crore) and 6.76 per cent GS 2061 (₹9,000 crore).
In the secondary market, G-Sec prices declined as the RBI neither cancelled the auction of the new 10-year G-Sec nor devolved it on primary dealers despite the market demanding more in terms of yield.
Rising yields
Market players are of the view that by accepting the cut-off yield at 6.10 per cent, the RBI seems to be acknowledging the rising yields in the secondary market.
Following the introduction of the new 10-year G-Sec, the price of the erstwhile 10-year benchmark 5.85 per cent G-Sec fell 43 paise to ₹97.63 (previous close: ₹98.06), with its yield rising about 6 basis points to 6.18 per cent (6.12 per cent).
Irani said once the float in the new 10-year GS increases after two-three auctions, there will be more trading in the paper.
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