A tsunami of negatives all set to sink India’s bond market

Prime Minister Narendra Modi’s government appears set to trim its borrowings for the second time this year.

Even so, the prospect of smaller debt sales is doing little to lift the pall over the battered Indian bond market. It’s not hard to see why, with headlines bringing in a barrage of bad news, from rising oil prices and a tumbling rupee to the debt crisis at a lender and a cash crunch in the banking system. The relief may be temporary, traders say.

“There’s been a tsunami of negatives, coming wave after wave, and this positive doesn’t stand a chance,” Naveen Singh, head of fixed-income trading at ICICI Securities Primary Dealership Ltd. in Mumbai, said by phone.

The government is likely to borrow Rs 2.48 trillion ($34 bn) in the six months to March 31, or Rs 200 bn less than the budgeted estimate, Singh said, citing market expectations after a recent media report. Debt sales for the fiscal first-half were lowered by Rs 500 bn as bonds faced the worst rout in at least two decades.

The boost to bonds after the first cut early this year failed to endure. Sovereign bonds have slid in seven of the past nine months, sending 10-year yields to a four-year high, as global funds remain net sellers amid a rout in emerging markets.
They’ve pulled $6.8 billion from rupee debt this year, the most among Asian markets tracked by Bloomberg.

The outcome of the Reserve Bank of India’s meeting next week will also have a bearing on bond yields, said Singh. The yield may jump to 8.25 per cent if the central bank raises rates, which would confirm market expectations of as many as four more increases from just two after the last meet in August, he said. Economists see the repurchase rate rising to 6.75 per cent by the end of the second quarter of next year, versus the first quarter of 2020 previously, according to the latest Bloomberg survey.

A reduction in the government’s borrowing by Rs 200-300 bn could lead to a modest drop in yields, said Vijay Sharma, head of fixed-income at PNB Gilts Ltd. in New Delhi.

India may cut gross borrowings for the second half of the fiscal year more than previously announced, BTVI television channel reported Friday. Finance ministry and RBI officials will likely meet Sept. 28 to decide October-to-March debt sale plan, the channel said.

“A deep rally in the current environment is not easy to come by,” Sharma said by phone. “I don’t think traders will be too willing to buy the dip right now.”