Govt likely to float new 10-year benchmark soon

The Government is likely to issue a new 10-year benchmark Government Security (G-Sec) in a week or two amid upward pressure on yields and the outstanding stock in the extant benchmark G-Sec swelling to ₹1.48-lakh crore.

Usually, the Government issues a new 10-year benchmark security when the outstanding stock in it reaches ₹1.10-1.20-lakh crore. This ensures there is no lumpy repayment obligation at any given point of time.

But this time, the Government has so far mopped up ₹1.48-lakh crore via the current benchmark 10-year G-Sec, carrying 6.10 per cent coupon rate. This paper was first issued on July 12, 2021.

The Government had issued the extant 10-year benchmark G-Sec at 6.10 per cent coupon rate against the preceding benchmark’s 5.85 per cent. This means the Government paid 25 basis points more to raise resources through the new paper.

Also read: G-Sec yields rise as RBI devolves three securities

Market players expect the new 10-year G-Sec to be issued at a coupon rate of 6.40-6.50 per cent, taking into account the fact that the yield on the current benchmark has risen about 10 basis points (to 6.4617 per cent) and its price has declined 67 paise (to ₹97.45) in the last six trading sessions.

Yields in the G-Sec market have been heading north ever since the US Fed signalled a hawkish stance (on December 15) and the Reserve Bank of India (RBI) stepped up variable reverse repo rate (VRRR) auctions to suck out surplus liquidity from the banking system.

Market reaction

Market players seem to have already factored in the possibility of a new 10-year paper being floated as there was hardly any movement in the yield and price of the current 10-year G-Sec on Friday despite three out of four G-Secs devolving on primary dealers (PDs) at the weekly auction.

The auction devolvement, however, had its impact on other G-Secs. For example, yield on the widely traded 6.67 per cent GS 2035 rose about two basis points to close at 6.8992 per cent and its price declined about 19 paise to close at ₹97.9625. Bond yield and price are inversely correlated and move in opposite directions.

RBI, as Debt Manager to the Government, devolves G-Secs at auctions when the bids are out of line with its expectations and the prevailing secondary market yields. The central bank is trying to ensure that the Government is able to raise resources at a reasonable cost even as there is upward pressure on yields.

Expert’s take

Madan Sabnavis, Chief Economist, CARE Ratings, observed that the RBI is expected to tighten in phases: addressing liquidity first, followed by raising the reverse repo rate, and finally the repo rate.

The third part is more likely to happen in the next fiscal year, post the announcement of the Budget, as going by RBI forecasts, inflation will still be a concern going forward, he said.