FII Outflows Bring Bond Yield Down By 93 bps

It is official now that foreign outflows from Indian debt market during August-September owing to taper talks by US Federal Reserve has played havoc for the Indian economy as average yield on the securities has spurt from 7.63 per cent in Q1 to 8.56 per cent in Q2, a whooping rise of 93 basis point in a matter of three months. During this period public debt of the government has also rose considerably due to declining rupee. 

As per the quarterly report released by middle office of Finance Ministry on public debt management for quarter ending September 2013, government issued one new security of 17 year maturity during the quarter as per the plan while the weighted average maturity declined considerably to 14.1 years of dated securities issued during Q2 from a period of 15.1 years in Q1. During this period weighted average yield has climbed to 8.56 per cent. Due to rising yield and high deficit the cash position of government has gone into deficit, showing a grave concern.

The report clearly says that in the secondary market, bond yields went-up during the quarter mainly due to capital outflows from debt market triggered by uncertainty regarding QE3 program of the US Federal Reserve and subsequent monetary tightening by RBI to support the Rupee as well as rise in inflation rate. For some kind of respite, bond yield steepened in the above 10-year maturity segment, while it remained flat in the below 10 years maturity segment. Due to grim outlook and acute volatility in the debt market in Q2 trading volumes have also declined amidst rising yields. It was so grave that outright turn-over ratio for Government securities for Q2 dropped to 3.5 from 9.3 during the previous quarter. 

During the quarter ending September 2013 total public debt of the Government increased on a quarter-on-quarter (QoQ) basis by 6.7 per cent compared with an increase of 4.4 per cent in the previous quarter. In turn total public debt has climbed to Rs. 45.80 lakh crore. For the financing of fiscal deficit also government’s borrowing climbed marginally and internal debt reached 90.8 per cent of public debt while it was at 90.6 per cent in the previous quarter. It is a measure of government borrowing to finance fiscal deficit and for FY14 finance ministry has budget a fiscal deficit of 4.8 per cent of GDP.

The only positive during the quarter was the residual maturity of outstanding securities up to 5 years declined 31 per cent while it was at 34 per cent in Q1. Actually this is particularly important as this helps in overcoming rollover risk of debt portfolio.