The yields poser

At times, empirical evidence can swerve from economic theory. That seems to be happening with south-ward bound government security (G-sec) yields in India.

Typically, higher fiscal deficit → higher government borrowings → higher supply of G-secs → lower G-sec prices → higher G-sec yields.

However, despite fiscal deficit being revised up to 3.8% of gross domestic product (GDP) for this fiscal – the highest in four years – compared with 3.3% budgeted earlier, the 10-year G-sec yield has slid ~100 basis points (bps) from 7.3% at the start of fiscal 2020 to 6.3% as on March 13.

Are yields ignoring fiscal cues? Well, not exactly.

Other factors are dominating, actually. Such as:

• Centre is relying less on market borrowings
  
  The central government has been borrowing significantly from the National Small Savings Fund (NSSF), a non-market source. That has taken some pressure off G-Sec yields. In fiscal 2020, while net market borrowings rose 16% on-year, that from NSS Frocketed 92%.
  
  This is not a one-off, either. The share of NSSF in funding fiscal deficit has risen steadily to 31.3% in fiscal 2020 from 1.3% in fiscal 2013, while the share of market borrowings dropped nearly a third to 65.1% from 96.2%.