Indian Bonds Tumble on Near-Record Borrowing, Focus Turns to RBI

(Bloomberg) -- A sell-off in Indian sovereign bonds on a higher-than-expected debt issuance plan is putting the spotlight on the Reserve Bank of India to calm yields.

The yield on the benchmark 10-year bond rose sixteen basis points to close at 6.06%, its biggest jump since May, while the rupee declined 0.1% to 73.0275 after Finance Minister Nirmala Sitharaman on Monday outlined a gross borrowing plan of 12 trillion rupees ($164 billion). The announced plan for the 12 months starting April was more than the 10.6 trillion rupees estimated in a Bloomberg Survey of fifteen analysts.

The government also plans to raise an additional 800 billion rupees by the end of the current fiscal year in March, on top of its record 13.1 trillion rupees projection. The new borrowing amount is also higher than the previous five year’s average of 6.07 trillion rupees.

“The market got disappointed as the borrowings came in higher than expectations,” says Naveen Singh, head of fixed-income trading at ICICI Securities Primary Dealership in Mumbai. “The focus now shifts to RBI to play a big role in supporting another year of huge supply.”

RBI’s open market bond purchases have been instrumental in keeping sovereign yields anchored despite heavy debt sales. Therefore, bond traders will seek assurance of the continuation of these measures when Governor Shaktikanta Das announces the policy decision on Friday. However, the RBI’s intent of draining excess cash amid a crash in short-term rates may limit the extent of its support measures.

READ: India Bonds Face Pivotal Week Ahead of Budget, RBI Meeting

The RBI may also face pressure to act as rising yields sour investor appetite for debt, making it challenging for the government to smoothly execute its borrowing plan. ICICI Securities PD expects the 10-year yield to rise by another 25-50 basis points in the coming months.

On the other hand, sentiment in India’s equity market was upbeat as the budget proposed setting up an asset management company to take over stressed assets of banks in addition to plans to divest two state-run lenders. India’s benchmark S&P BSE Sensex index climbed as much as 5.4%, the most since April.

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