Bond Market Uncertainties Seen Pushing India's Borrowing Costs Higher

Mumbai: India's cash-strapped government could be forced to pay yields of close to 8 per cent, significantly raising its borrowing costs, if it tries to sell a new benchmark bond issue in the wake of a foreign investor backlash over tax demands. Foreign funds had hoped they would not be liable to a minimum alternative tax (MAT) that India imposed from late last year. Angered by the unexpected tax bills recently received, and fearing other potential tax liabilities, foreign funds unloaded Indian bonds in a move that coincided with a sell-off in global debt markets. The timing is unfortunate. The sudden spike in bond yields in the past two weeks, a 3.8 per cent decline in the rupee since the end of February, and weak share markets have all combined to reduce investors' risk appetite. "Old school views are; never to dabble much in bonds when a currency is under turmoil. Stay away until the currency stabilises, otherwise you will burn your fingers," said Anoop Verma, vice president, fixed income at DCB Bank. The government, however, has less room to delay the launch of a new issue. To meet its fiscal deficit target, the government aims to raise a gross Rs 6 lakh crore ($93.84 billion) in bond sales in the fiscal year ending in March 2016. "The uptick in debt yields will impact government borrowing costs," said Kumar Rachapudi, a fixed income strategist with ANZ Bank in Singapore. "If the fiscal deficit was lower, then supply would not have been an issue." India typically introduces a new 10-year bond every year, in what is one of the most anticipated events for traders, and there are some expectations that it could happen next week. The current 8.40 per cent benchmark 10-year bond has reached an outstanding amount of Rs 90,000 crore ($14.11 billion) - a level that in the past has prompted the government to announce a new issuance in order to spread out redemption pressures. At its peak last Friday, the yield on the benchmark 10-year bond had risen 22 basis points in a two-week surge that has dented a year-long long rally in Indian debt. The 10-year yield is now trading at 7.92 per cent, still up sharply from the 2015 low of 7.64 per cent on Feb. 3. Those are similar levels to December, before the Reserve Bank of India cut interest rates twice - in January and March -for a combined reduction of 50 basis points - so the government will hardly benefit from the central bank's easing. To compensate for the volatility, traders said they expect the government will have to pay yields closer to the prevailing market levels - potentially closer to 8 per cent - if the sale of a new 10-year bond issue is made soon. Investors are unlikely to bid aggressively as they did last year, when they bought new paper at around 20-25 basis points below the prevailing market yields, traders said. The growing risk aversion was evident last Friday, when India had to set higher yields than expected to sell debt at its weekly auction. .© Thomson Reuters 2015

Bond Market Uncertainties Seen Pushing India's Borrowing Costs Higher

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