The demand for Government Securities (G-Secs) by banks could be affected with the economic recovery gaining momentum as there will be a pick up in credit growth and banks’ appetite to lend to the private sector, according to Crisil.
In 2020, yields drooped because of extraordinary easing moves by both, the Reserve Bank of India (RBI) and global central banks.
The Centre has budgeted to borrow ₹12.1-lakh crore next fiscal, only a shade less than the ₹12.8-lakh crore in fiscal 202 (revised estimate) and much higher than ₹7.1-lakh crore in fiscal 2020. Stressed state finances means supply of state development loans could be copious as well, it added.
Referring to the economic recovery gaining momentum, Crisil said this implies a pick-up in credit growth.
Banks will now have more options than the government to lend to, which could put some pressure on G-Sec yields, said Dharmakirti Joshi Chief Economist, Dipti Deshpande, Senior Economist and Pankhuri Tandon, Economist, in the report.
Crisil estimates bank credit growth to double to 8-10 per cent next fiscal from about 4-5 per cent this fiscal. Simultaneously, an increase in spending leading to dissavings by households could moderate deposit inflows at banks.
The economists observed that the RBI will have to keep an eye peeled for inflation amid an expansionary fisc and rising input costs, though in general, inflationary pressures are expected to remain under control.
“As of now, the RBI is not short on ammunition. But it may need to turn back the accommodative tap if inflation pressures rise. Some normalisation of liquidity has already begun,” they said.
Meanwhile, rising crude prices could lend an upside to yields. Crisil expects Brent crude to rise to $50-55 per barrel in calendar 2021, almost $10 per barrel higher than in 2020.
The report emphasised that the RBI is also concerned about easy liquidity fuelling asset-price inflation and destabilising markets.
In other words, though the February 5 monetary policy review confirms the RBI’s intent to support the government’s borrowing programme next fiscal, maintaining such high levels of liquidity may no longer be easily possible, it added.
Overall, Crisil believes, supply pressures will have a bearing on the 10-year G-sec yield once the RBI starts unwinding its ultra-accommodative monetary policy stance.
The agency expects the yield to settle at about 6.2 per cent by March 2021 and rise to 6.5 per cent by March 2022, which would still lower than the decadal average of 7.7 per cent.