On Monday the yield on the two liquid 10-year Government Securities (G-Secs) hardened further by 5-7 basis points, making everyone focus on the next move of the Reserve Bank of India. Since January-end, the yields on the new 10-year benchmark (5.85% GS 2030) and the earlier benchmark (5.77% GS 2030) have grown about 30 and 28 basis points, respectively.

In terms of price, the new 10-year benchmark and the earlier benchmark weakened about ₹2.14 and ₹1.93, respectively, since January-end in the secondary market as the bond yields and prices move in the reverse direction.  The growth in yields comes in the backdrop of the government announcing in the Budget that it will borrow an additional ₹80,000 crore in February-March and the borrowing for FY22 would be ₹12-lakh crore. Concerns are thus rising about the oversupply of government paper, which can have a crowding-out effect on private sector investments and increase the overall cost of borrowing in the economy.

Soumya Kanti Ghosh, State Bank of India’s Chief Economic Adviser, has warned regarding further upward movements even by a mere 10 bps from the current levels in G-Sec yields could lead to mark-to-market (MTM) losses for banks. Banks will require to make provisions for depreciation in investments in case of an MTM loss.