Budget 2022: Investors brace for another year of high bond supply

The upcoming financial year of 2023 is likely to provide the Indian Government with a little room to reduce its market borrowings, considering its revenue figures are strong. However, this news does not spoil the party for bond investors. The reason being, a redemption pile of about Rs. 4.5 lakh crores throughout this fiscal year and the need of supporting an economy that is recovering from a pandemic will ensure the continued supply of bonds to the market.

Moreover, looking at this scenario from a purely macroeconomic perspective, the need for this financial support is understandable. Since the GDP is low in terms of compounded annual growth of two years, experts believe the fiscal policy will be accommodative.

Jeffries India also projects a 20% rise in India’s capital expenditure, factoring in the spending on food and fuel subsidies. Contrarily, the upshot here is that India’s fiscal deficit will at best reduce a few points compared to that of FY 2022. Hence, the Government has to continue its double-digit borrowing to meet this gap.

Bonds Are Maturing in FY 2023

Reserve Bank of India’s data reflects that Government Bonds of around Rs. 4.5 lakh crores will mature in FY 2023. It means the Indian Government needs to borrow at least Rs. 4.5 lakh crores just to repay its current obligations.

In this ongoing financial year, the bond redemption was estimated at Rs. 2.4 lakh crores, which is 20% of the market borrowing considered in the budget. Therefore, taking the Government’s probability of gross borrowing into account, it will be higher than that of the existing financial year.

Experts at Morgan Stanley believe that gross borrowing in FY 2023 will increase to Rs. 15 lakh crores. Whereas, for this financial year of 2022, it was Rs. 12.05 lakh crores as mentioned in this year’s Union Budget.

Finding a Buyer

Let’s take the context of FY 2021, when this supply of bonds increased exponentially due to the Covid-19 pandemic. Contrarily, the bond yields fell more than 100 basis points in that same year. A point to note here is that bond price and its yields share an inversely proportional relation.

What was the reason?

Primarily it is due to RBI’s decision to infuse liquidity in the market using various monetary policy techniques. Additionally, the apex bank of India has been one of the constant buyers of Government bonds.

Fast forward to FY 2022, RBI has been a more reluctant buyer. Its purchase in amounts dropped from Rs. 3.1 lakh crores to Rs. 1.4 lakh crores. Additionally, in recent months, RBI has been the biggest seller of these bonds in the secondary market.

This move from the RBI has, however, created confusion in the market, leaving investors wondering whether this is a permanent feature or will it ease off.

Poised for an Exciting Next Year

The next year will be one to note for India’s bond market. An increase in bond supply and RBI’s likely decision to switch from an accommodating position is the perfect push for this market.

The reason is that yields are likely to increase, considering a reduction in market liquidity, inflation pressure, and a hostile sentiment in the global bond market.

However, the only silver lining here is that the prospect of including global bond indices can create a spark. Market experts, on the other hand, predict that this could be a short-lived joy.

Parting Thoughts

With the odds against it currently, the Indian Government has to take more initiatives to find buyers for its bonds. Therefore, RBI will again have a challenge in managing its borrowing costs effectively.

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Frequently Asked Questions

1. How to invest in Government bonds in India?
   The easiest way to invest in Government bonds is through Government Securities Mutual Funds or GILT funds.

2. Is a cash management bill a type of Government bond?
   Yes, a cash management bill is a sub-type of a Government bond.

3. What are inflation-indexed bonds?
   Inflation-indexed bonds are where principal as well interest earned on these bonds varies with the market inflation rate.

Disclaimer: This blog is exclusively for educational purposes and does not provide any advice/tips on investment or recommend buying and selling any stock.