Government bond yields in India have risen so far in 2009 and we think they will grind higher in 2010. The ten-year government bond
yield could pierce 8% from 7.3% now.
Government net debt issuance will be Rs5 tn (7.6% of GDP) in 2010. Against that, the government will not be able to substitute bonds for MSS securities and the RBI will not be able to buy government bonds in 2010 as much as it did in 2009.
Unusually high banking system liquidity should diminish as the RBI starts hiking the CRR and as bank lending accelerates. Also, annual inflation rates are likely to exceed 7% in 1Q 2010 and hover around 6% in the remainder of 2010.
It is doubtful if RBI can monetise the fiscal deficit by this amount in 2010 when real GDP and credit will be growing faster and inflation rates will likely be in high single-digits.
