As inflation continues to moderate, bond yields will also soften and borrowing costs will come down, Reserve Bank of India Governor Shaktikanta Das said on Monday.
The country's retail inflation fell to a three-month low of 5.1% in January and the Indian benchmark 10-year bond yield closed at 7.095.
Das explained that interest payments as a quantum were linked to bond yields at a post-budget press conference in New Delhi.
"Government borrowings, which are done during that period (of high interest rates), naturally will have higher borrowing costs because the yields will be high," he said. "As we move forward and as inflation starts to moderate, logically, the bond yields should also come down."
The central bank governor said the 10-year bond yields had moderated to the range of 7.17–7.18% from 7.3–7.4% earlier.
"So, it (yields) is a function of your inflation level and (the) quantum of liquidity available in the system." Das said. He highlighted that in the first year of the Covid-19 pandemic, the government's borrowing costs were one of the lowest due to the RBI's steps that year.
The governor said that the Union government—following the fiscal consolidation path—helped keep borrowings lower, inducing growth in the banking system.
"It (lower quantum of borrowing) would ensure that much more resources are left in the banking system to meet the requirements of the private sector," he said. "Requirements of (the) private sector mean growth-inducing measures, making more credit available to (the) private sector to make their investments."
He said that the quantum of borrowings is important, as it is one of the factors that is taken into consideration while making monetary policy.
The lower quantum of borrowings is growth-inducing and it has some positive impact as it would help stabilise inflation, according to Das. "How much it would help, I wouldn’t like to quantify, but it does help stabilise inflation and would help in moderating inflation."
Inflows After Inclusion In JPMorgan Bond Index
The central bank expressed confidence in managing flows, ahead of the expected increase in inflows after India's inclusion into JPMorgan's Government Bond Index-Emerging Markets in the next fiscal.
It is not as if the inflows are all going to come in a single burst; it will come over a period of time, said Das.
"If you go by our track record, (the) RBI has managed both when there are outflows and when there are inflows. In both the situations, the RBI has got an excellent track record in managing the flows," he said.
"Even this year also, we are confident of handling the higher expected inflows; as and when such a thing materialises, we will be able to deal with it."
However, the RBI governor declined to comment on the impact the inflows would have on yields and the yield curve in the future.
India is expected to reach the maximum weight of 10% in the GBI-EM. Currently, 23 Indian government bonds, with a combined nominal value of $330 billion, are index eligible. The inclusion of the IGBs will be staggered over a 10-month period—starting June 28, 2024, through March 31, 2025—with an inclusion of 1% weight per month.
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