Citi Abandons Day-Old Buy Call in ‘Perfect Storm’ for India Debt

(Bloomberg) -- Indian bonds are set for a torrid year, with supply rising to record levels while demand wanes.

Citigroup Inc. offered a glimpse of the conditions facing the nation's debt when it withdrew a buy call within a day of recommending purchases. Yields surged the most in almost two years Tuesday after Finance Minister Nirmala Sitharaman unveiled a bigger-than-anticipated borrowing plan without signaling who could buy the paper.

Citi and other investors had been betting that Sitharaman would unveil a path toward inclusion of Indian debt in global indexes, which would bring foreign inflows. When that didn't materialize, traders were confronted with reality: India's government is borrowing unprecedented amounts of money just as its central bank runs out of room to buy more bonds.

“Bonds in India face a perfect storm,” said Arvind Chari, chief investment officer at Quantum Advisors Pvt.

He pointed to rising global inflation, which is forcing central banks around the world to tighten policy. Then there's the fact that Indian banks -- the largest purchasers of sovereign paper -- are already overstocked. The Reserve Bank of India halted its quantitative easing program last year.

Signs of stress had appeared even before the budget. Primary dealers rescued multiple auctions in recent weeks, reflecting dwindling demand for sovereign paper.

Key Numbers:
India forecast a wider budget deficit -- 6.9% of GDP rather than the 6.8% predicted earlier -- for the year through March 31 It will borrow 14.95 trillion rupees ($200.7 billion) in the year starting April 1, higher than the 13 trillion rupee consensus estimate in a Bloomberg survey The yield on the benchmark 10-year note jumped 17 basis points to 6.85% on Tuesday -- the highest since 2019 -- matching the level at which Citi had an indicative stop on its recommendation

Key Numbers:

India forecast a wider budget deficit -- 6.9% of GDP rather than the 6.8% predicted earlier -- for the year through March 31
It will borrow 14.95 trillion rupees ($200.7 billion) in the year starting April 1, higher than the 13 trillion rupee consensus estimate in a Bloomberg survey
The yield on the benchmark 10-year note jumped 17 basis points to 6.85% on Tuesday -- the highest since 2019 -- matching the level at which Citi had an indicative stop on its recommendation

The 10-year yield may hit 7% in coming months in the absence of any support, according to traders in Mumbai including Harish Agarwal at FirstRand Bank Ltd. The yield rose five basis points to 6.89% on Wednesday, after surging by 14 points on Tuesday.

Focus now shifts to the Reserve Bank of India's policy meeting next week. Dhaval Kapadia, director for managed portfolios at Morningstar Investment Advisers India, said the RBI may need to re-introduce measures such as open-market purchases to manage yields.

In the six months to September 2021, the RBI bought bonds worth 2.4 trillion rupees through its open-market operations, keeping 10-year yields around an average 6.10%. It halted the support in October.

Meanwhile the U.S. Federal Reserve is preparing to start raising interest rates.

“Macro risks from a global tightening cycle would be a key concern,” said Prabhat Awasthi, country head for India at Nomura Holdings Inc. It “needs to be watched carefully.”