Markets News

Rising Bond yields leading to fund outflow from markets

Last week, the markets weakened due to rise in bond yields both in the domestic and global markets.

Moreover, rising bond yields globally have raised investor concerns with many investors going for profit booking, resulting in a further decline.

The government had announced huge borrowing programme in the Union Budget 2021 for fiscal year 2022.

This leads to tightening of 10 year government bond yields.

Hence, the prices of these bonds moved up from the recent low of 5.76 per cent to 6.19 per cent.

Further, it hiked over 1 per cent from Friday’s closing of 6.132 per cent to 6.196 per cent on Monday.

The government aims to raise money to fund expenditure through issue of bonds.

Investors reallocate their investments into bonds after rise in bond yields as they are much safer compared to equities.

With increase in bond yields, the cost of capital for companies also rises which in turn compresses the valuations of their stocks.

The budget mentioned about an additional borrowing of Rs 80,000 crore in FY21 besides another Rs 12 lakh crore in FY22.

However, RBI will play a key role in ensuring that there’s ample liquidity in the financial markets.

This has however not convinced the markets due to gradual return to normal liquidity scenario as per Central Banks.

It is expected that cash Reserve Ratio (CRR) will be reverted to the 4 percent- level in two tranches.

The central bank announced liquidity measures worth over Rs 12 lakh crore to support the financial system.


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