Yields Just Keep Climbing in India Even With All That RBI Does

India’s sovereign bond yields are climbing just as the government is kicking-off its record borrowing plan

Yields Just Keep Climbing in India Even With All That RBI Does
A man walks on a street during a lockdown imposed due to the coronavirus in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)

(Bloomberg) -- India’s sovereign bond yields are climbing just as the government is kicking-off its record borrowing plan, in a sign of market discomfort with the heavy debt supply.

The benchmark 10-year yield extended rise on Tuesday, after jumping by the most in over a year in the previous session, in reaction to the government’s 4.88 trillion rupees ($64 billion) fund-raising plan for April-September. That’s despite the Reserve Bank of India’s recent reduction in key policy rate by 75 basis points and liquidity inducing measures to shield the economy from the coronavirus impact.

Here’s an in-depth look at what’s happening in India’s bond market:

Why are yields rising?

The government’s borrowing plan for the fiscal first-half starting April 1 entails a weekly debt supply of 190 to 210 billion rupees, an increase of as much as 23% over the previous year.

Auctions begin on Thursday and will be held every week this month, even with the nation in a complete lockdown until at least April 14. Trading volumes have plunged and volatility has spiked in markets. There’s widespread concern that demand at auctions may suffer in this backdrop.

The market faces higher Treasury bill sales this quarter of 3 trillion rupees, up from 2.6 trillion in the same period last year. Weekly state debt sales may also get enhanced after the federal government is said to have allowed provinces to borrow as much as half of their annual target whenever they choose.

What’s the RBI doing?

Other than the rate cut, the RBI has also pledged to infuse $50 billion into the country’s financial markets two weeks ago to ease the cash strain on firms caused by the virus outbreak.

It bought 400 billion rupees of bonds last month via open market purchases but it’s yet to announce a purchase calendar for the new fiscal year. Nomura Holdings Inc. estimates that the RBI may need to buy 2 trillion rupees of debt to soothe the market.

Economists, including those at State Bank of India, think authorities will have to bite the bullet and allow RBI to buy bonds in primary auctions, a step it last resorted to in the 2000s.

Authorities have ruled out any direct debt placements with RBI or with state-owned Life Insurance Corp. of India for now.

The RBI on Friday cut trading time by four hours in bonds and the currency markets to curb volatility. Markets will be open 10 a.m. to 2 p.m. Mumbai time starting April 7 through April 17.

Will opening up to foreign investors help?

Not immediately. India has lifted all ownership limits on some of its existing bonds and new debt to foreign investors. However, that move is seen beneficial in the longer run as it increases the likelihood of Indian bonds being included in global bond indexes.

Currently, existing limits remain under-utilized, with India seeing 549.5 billion rupees of outflows from sovereign bonds in the last quarter, the most on record in data going back to 2014.

Yields Just Keep Climbing in India Even With All That RBI Does

Is there risk of increased borrowing?

Yes. The borrowing amount announced is based on the current year’s fiscal deficit aim of 3.5% of gross domestic product.

Finance Minister Nirmala Sitharaman has outlined a virus relief package of 1.7 trillion rupees and may be planning more support. That could push up the government’s fiscal deficit target to as high as 6.2% of GDP in the current year, according to Fitch Solutions.

That along with a drop in tax revenues on account of the three-week lockdown will put pressure on the nation’s coffers.

Nomura estimates sovereign supply excluding redemptions will reach 7.9 trillion rupees for the fiscal year. Enhanced demand for debt from banks and central bank’s open-market purchases will help, but still result in a 300 billion rupee shortfall, it said.

©2020 Bloomberg L.P.